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Category: Indirect Taxes

Recent Developments in GST

A. NOTIFICATION

Vide Notification No. G.S.R. 256(E) dated 24.4.2025, the Goods and Services Tax Appellate Tribunal (Procedure) Rules, 2025 are notified.

B. ADVISORY

i) Vide GSTN dated 11.4.2025, the information relating to Reporting Values in Table 3.2 of GSTR-3B is provided.

ii) Vide one more GSTN dated 11.4.2025, the information relating to changes in Table-12 in HSN Code in GSTR-1 or GSTR-1A is provided.

iii) Vide GSTN dated 1.5.2025, the information about Biometric based Aadhaar Authentication and Document Verification for GST Registration Applicants of Sikkim is provided.

iv) Vide GSTN dated 1.5.2025, the information relating to changes in Table-12 and list of documents in table 13 of GSTR-1 or GSTR-1A is provided.

v) Vide GSTN dated 6.5.2025, the information about Invoice-wise Reporting Functionality in Form GSTR-7 on portal is provided.

vi) Vide GSTN dated 8.5.2025, the information about updates in Refund Filing process for various refund categories is provided.

vii) Vide GSTN dated 8.5.2025, the information about updates in Refund Filing process for Recipients of Deemed Export is provided.

C. INSTRUCTIONS

(i) The CBIC has issued instruction No.3/2025-GST dated 17.4.2025 by which instructions for processing of applications for GST registration are provided which are further revised vide instruction dated 18.4.2025.

(ii) The CBIC has issued instruction No.4/2025-GST dated 2.5.2025 by which Grievance Redressal Mechanism for processing of application for GST registration is provided.

(iii) The CBIC has issued instruction No.5/2025-GST dated 2.5.2025 by which instruction about timely production of records/information for audit is provided.

D. ADVANCE RULINGS

Classification – PVC Floor Mats

Manishaben Vipulbhai Sorathiya (Trade Name: Autotech)

(AAAR Order No. GUJ/GAAR/APPEAL/2025/10 (In Application No. Advance Ruling/SGST&CGST/2023/AR/06) Dated: 28.2.2025) (Guj)

The present appeal was filed by M/s. Manishaben Vipulbhai Sorathiya (for short – ‘Appellant’) against the Advance Ruling No. GUJ/GAAR/R/2023/10 dated 9.3.2023 – 2023-VIL-46-AAR in which the AAR, determined classification of above product under CTH 8708, liable to tax @ 28%. In appeal, ld. AAAR noted the facts as under:

The PVC floor mat is made of the following four raw materials.

“[i] PVC leather commonly known as artificial leather

  •  It gives the impression of leather;
  •  It is derived by laminating PVC and fabric;
  • It is cheaper than leather;
  • It is classified under HSN 59031090 and leviable to GST @ 12%.

[ii] PU Foam also known as polyurethane foam

  •  It is classified under HSN 39211390 and leviable to GST @ 18%.

[iii] XLPE foam known as cross linked polyethylene foam

  •  It’s a cross linked closed cell foam with compact feel;
  •  Its resistant to water;
  •  It is classified under HSN 39211390 and leviable to GST @ 18%.

[iv] PVC mat, commercially known as Heel pad

  •  The heel pad is nothing but additional foot support for the driver of the vehicle;
  •  It is classified under HSN 39211390 and leviable to GST @ 18%.”

The manufacturing process of the said floor mat was also elaborated.

The ld. AAR held that PVC floor mats will not fall under 3918 but under 8708 because:

  • ” the HSN note 8708 covers parts and accessories of the motor vehicles falling under 8701 to 8705 subject to two conditions first being that the goods in question must be identifiable as being suitable for use solely or

         principally with the vehicles mentioned from 87.01 to 87.05 which stands satisfied as the floor mats made of PVC, is suitable for use principally with the motor vehicles for which it is being manufactured, it being a tailor made product;

  •  The second condition is that these goods must not be excluded by the provisions of the note 2 of Section XVII; that PVC floor mats for four wheel motor vehicles docs not fall in the exclusion;”

Appellant reiterated its facts and submissions in appeal. Appellant raised new ground for classification under CTH 5705.

The ld. AAAR observed that this plea of classifying the product under HSN 5705 is made for the first time before it and hence it cannot be entertained. For this purpose, Ld. AAAR relied upon judgment of the Hon. Supreme Court in the case of M/s. I.T.C. Ltd. [2004 (171) EL 433 SC – 2004-VIL-13-SC-CE].

Thus, ld. AAAR rejected to entertain the ground of classifying product under HSN 5705.

In respect of existing decision of AAR, which is in appeal, the appellant sought to argue that floor mats in question have been excluded from HSN 8708 by explanatory notes. However, ld. AAAR noted  that the said issue is already dealt with by AAR  and considering overall position, Ld. AAAR confirmed AR passed by AAR and dismissed the appeal.

Classification of service – Restaurant vis-à-vis Composite Supply

Pioneer Bakers 

(AAAR Order No. 02/ODISHA-AAAR/APPEAL/2024-25 Dated: 18.12.2024) (Odisha)

The facts are that the Petitioner (appellant) M/s Pioneer Bakers is a partnership firm and had filed an application for Advance Ruling on 04.05.2020. Their principal business is producing and selling of bakery products viz cakes, artisan cakes, pastries, pizza, patties, sandwich, self- manufactured ice-creams, handmade chocolates, cookies, beverages etc. They also offer a number of customisation options to customers with respect to the above-mentioned products.

The appellant put various questions for ruling before the ld. AAR and the AR was passed bearing no. 06/ODISHA-AAR/2020-21 dated 09.03.2021 – 2021-VIL-196.

Broadly the ld. AAR held that items prepared at premises of appellant and supplied to customer
from counter are falling in restaurant service, whereas dealing in bought out items is not restaurant service.

Aggrieved by the AR passed by the AAR, the Jurisdictional Officer i.e. Asst. Commissioner, filed an appeal on 28.04.2021 before the AAAR on allegation that the order is obtained by way of colouring the facts and pleaded that the said ruling is liable to be struck down.

The AAAR, concurring with the Department, reversed the AR vide its order No. 02/Odisha- AAAR/Appeal/2021-22 dated 27.07.2021 – 2021-VIL-36-AAAR.

The appellant then approached Orissa High Court by way of writ petition. High Court remanded matter back to AAAR for taking fresh decision after due compliance of the principles of natural justice.

Therefore, these fresh appeal proceedings.

The appellant reiterated the submissions made vide letter dated 28.08.2024 and relied upon the CBIC Circular No. 164/20/2021-GST dated 06.10.2021. Various precedents were cited.

The appellant submitted that it is providing all the services and facilities as in any other restaurant and as such cannot be given a discriminatory treatment and submitted that it charges consideration for various services described by it.

The ld. AAAR summarized facts of the appellant as under:

“5.1. We are given to understand that the Petitioner has established itself as a band in the field of bakery items and especially in cakes. The business of the Petitioner is producing and selling of bakery products viz cakes, artisan cakes, pastries, pizza, patties, sandwich, self-manufactured ice-creams, handmade chocolates, cookies, beverages etc in its various outlets operating in the state of Odisha. It was submitted that the raw materials are manufactured in the nearby workshops which are brought to the outlets for further processing. Nothing is sold directly from the workshop and each and every item is brought to the outlets for sale. Further, it has been submitted that outlets of the Petitioner are equipped with all the facilities to dine such as table and chairs, air conditioner, drinking water, stylish lights for providing nice ambience which provide an overall good experience to the customers. The customers are provided with the option of either enjoying their food in the outlets itself by utilizing the facilities present in the outlets or they are at the liberty to take away their food. At the time of personal hearing, Mr Suresh Tibrewal, Advocate stated that the outlets after a whole lot of customization options and the majority of the goods sold are processed or go through any kind of service such as special packaging, decoration, customization before reaching the customers. He has also stated that the nature of business in the present case is not merely selling of goods but is a combination of goods and services in which the customer avails the services/facilities along with the goods in the outlets of the Petitioner.”

Referring to definition of ‘composite supply’ in Section 2(30) and clause (b) of para 6 of Schedule-II, the activity was held as ‘service’.

The ld. AAAR also referred to Notification No 11/2017-Central Tax (Rate) dated 28-06-2017, as amended by notification No. 46/2017-Central Tax (Rate) dated 14-11-2017, determined the rate to be @ 5% provided no ITC is taken on goods and services used in supplying the service.

However, in respect of supply of items such as birthday stickers, candles, birthday caps, Balloon, Carry Bags, snow sprays etc., the ld. AAAR observed that the said items are being purchased and sold as such without any further processing in the restaurant. The ld. AAAR held that sale of such bought out goods as such, is not a service but sale of goods and not covered by Notification No. 11/2017-Central Tax (Rate), dated 28-6-2017 but by Notification No. 1/2017-Central Tax (Rate) as amended from time to time.

Finally, the ld. AAAR passed an issue-wise ruling which is on the same lines as in the original AR, wherein the benefit of 5% was given to restaurant service but not given to brought out items sold without any process.

Classification of service – leasing of electric vehicles, transfer of right to use goods.

True Solar Private Limited.

(AAAR Order No. 03/ODISHA-AAAR/APPEAL/2024-25 Dated: 18.12.2024) (Odisha)

Applicant M/s. True Solar Private Limited is engaged in supply of goods and Services. The applicant has executed a vehicle lease agreement with Lessee named M/s. Techsofin Private Limited of Bhubaneswar, Odisha for supply of electric vehicles (E-Bikes) without operator on lease basis.

The applicant has sought ruling in respect of following questions:

“whether leasing of electric vehicles (E-Bikes/ EVs) without operator can be classified under the heading 9973 – “Leasing or rental services without operator vide Sl. No. 17(viia) or (iii) of the Notification No. 11/2017 – CT(R) dated, 28th June, 2017 as amended vide Notification No. 20/2019 – CT(R) dated, 30th September, 2019”.

The contention of applicant was that it fulfils criteria laid down by Supreme Court in BSNL and the transaction is for transfer of the right to use the goods and hence transaction is specifically covered under Sl.No.17(iii) of rate notification no. 11/2017 – Central Tax (Rate) dated 28th June 2017 as amended. It was also submitted that even if entry Sl. No.17(iii) is not applicable, entry No.17(viia) will apply where the applicant will be liable to pay tax at the rate of tax applicable to the supply of like goods.

However, in AR proceedings, both the members of AAR took different opinions/views which is summarised below:

“Opinion/ View of AAR SGST Member: – Leasing of electric vehicles (E-Bikes) without operator is classifiable under the heading 9971 i.e. Financial and related services under entry Sl. No. 15 (ii) of Notification No. 11/2017 – CT(R) dated, 28th June, 2017 as amended vide Notification No. 20/2019 – CT(R) dated, 30th September, 2019” and the rate of tax will be the same rate as applicable on supply of like goods involving transfer of title in goods.

Opinion/ View of AAR CGST Member – “Leasing of electric vehicles (E-Bikes/ EVs) is classifiable under the heading 9971 under entry Sl. No. 15 (vii) of Notification No. 11/2017 – CT(R) dated, 28th June, 2017 as amended and the rate of tax as applicable is 18% (CGST-9% + SGST-9%).”

Hence the matter was transmitted to Appellate Authority of Advance Ruling (AAAR), Odisha in view of the Section 98(5) of the CGST Act, 2017.

The ld. AAAR observed that lease agreement is executed between the Applicant and its lessee. Ld. AAAR observed that leasing can be of two types – financial lease and operating lease. A financial lease is a lease where the risks and the returns get transferred to the lessee as they decide to lease assets for their businesses. An operating lease, on the other hand, is a lease where the risk and the return stay with the lessor. The AAAR also referred to various differences between a financial lease and operating lease.

Based on above basic position, in respect of Lease Agreement of applicant, the ld. AAAR observed that the applicant has agreed to give and deliver EVs to lessee on lease for forty-eight months, unless termination of the contract/agreement. It also observed that the leasing period of the EVs seems to cover a major part of its economic life of EV and it is contract for the long term.

The ld. AAAR also noted other conditions like maintenance, permits etc. Option was provided to lessee to purchase the asset after expiration of
lease. Therefore, the ld. AAAR observed that the applicant has entered into a financial lease agreement with the lessee and applicant is engaged in supply of financial leasing services/financial and related services. The ld. AAR held that the appropriate heading for the said service would be 9971, entry at Sl. No. 15 of Notification No. 11/2017-C.T. (R), dated 28-6-2017 as amended from time to time and the rate of tax will be the same rate as applicable on supply of like goods involving transfer of title in goods.

ITC vis-à-vis Transportation facility

Kirby Building Systems & Structures India Pvt. Ltd. (AAAR Order No. AAAR.COM/01/2024 dt. 20.2.2025 (in Order in Appeal No. AAAR/07/2025 (Telangana)

The appellant, M/s. Kirby Building Systems & Structures India Private Limited are engaged in manufacture and supply of pre-engineered
buildings and storage racking systems. They provide canteen and transportation facilities to its employees at subsidised rates as per the terms of the employment agreement entered into between the appellant and the employee. The appellant has framed four questions for advance ruling.

Amongst others, vide the impugned order no. 22/2023 dated 15.11.2023 – 2023-VIL 198-AAR, the AAR gave advance ruling on the question raised by the appellant on issue (4) as under:

The appellant filed appeal in respect of above point no. (4).

Appellant submitted that it is arranging for transportation facility at subsidised rate as per the employment agreement by hiring non-air-conditioned buses from third party vendors and discharging applicable GST under Reverse Charge Mechanism (RCM).

The appellant submitted that ITC cannot be restricted merely because there is no statutory obligation for providing transportation facilities.

The ld. AAAR referred to provision of section 16(1) which authorised eligibility to ITC.

The ld. AAAR also referred to provision of Section 17(5) of the Act which blocks ITC in certain cases.

Proviso to Section 17(5) provides as under:

“Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.”

The ld. AAAR observed that Section 17(5) clearly stipulates that input tax credit shall be available only if it is obligatory on the part of the employer to provide the impugned services to its employees under any law. In case of appellant, the facility is for personal convenience. The ld. AAAR observed that since the appellant is not under statutory obligation to provide transportation facility to their employees, in terms of Section 17(5)(g) of CGST Act, 2017 read with above proviso, input tax credit is not available to appellant.

The appellant’s contention that they are providing transport services under contractual agreement and ITC cannot be restricted merely because there is no statutory obligation for providing transportation facilities was rejected by the ld. AAAR by observing that a “contractual obligation” cannot be equated with “statutory obligation”. It is also observed in AR that outward transportation activity is held not liable to tax, being covered by Circular no.172/04/2022-GST dt. 6.7.2022 and therefore also ITC is not eligible.

Accordingly, the AR is confirmed by dismissing the appeal.

Classification – HDPE Woven Fabrics, Geo-membrane technical textile

Lamifabs & Papers Pvt. Ltd.

[AAAR Order No.GST-ARA-32/2024-25/B-154 Dated: 26.03.2025 (Mah)]

The applicant, engaged in manufacture/supply of HDPE Woven Fabrics, sought advance ruling in respect of the following questions.

“Q.1 What is the HSN code for GEO MEMBRANCE laminated HDPE woven polymer lining?

Q.2 What is the GST Rate on GEO MEMBRANCE laminated HDPE woven polymer lining?”

Applicant provided relevant information including for raw material, manufacturing process and technical details.

It was submitted the that “other plates, sheets, film, foil and strip, of plastics, non-cellular and not reinforced, laminated, supported or similarly combined with other materials” are covered by HSN 3920 and liable to GST @ 18%.

However, Textile products and articles, for technical uses, specified in Note 7 to this Chapter; such as Textile fabrics, felt and felt-lined woven fabrics, coated etc. are covered by HSN 5911 and liable to tax @ 12%.

The ld. AAR observed that “the first stage of manufacturing is the ‘Tape Extrusion Process’ wherein HDPE Granules with UV Stabilized property, with appropriate carbon black admixture are extruded through sheet die to produce solid sheet which is further uniformly slit into number of tapes, which are then passed through hot air oven for twist stretching with proper orientation to the tapes to achieve the required tape width and desired strength. The width of the tape is between 2.1mm to 3.7mm. HDPE Tapes / Strips are then wound on bobbins for further processing. The Second stage of the manufacturing process is the ‘Fabric Weaving Stage’ where the said HDPE Tapes/ Strips of width less than 5mm are taken to circular looms and are woven into HDPE Woven Fabrics. The said High Density UV Stabilized Woven Fabrics are manufactured with specific weaving pattern through circular ring on horizontal and vertical direction to impact the essential property of Geomembrane fabrics i.e. impermeable to water for the specific end use of water retention. The third stage of the manufacturing process is ‘the Lamination Coating’ where the HDPE Woven Fabrics are laminated on both sides, along with sandwich lamination, wherever required, with the suitable combination of specific thickness LDPE Film, LLDP Bonding, UV Stabilizer, some other additives and black masterbatch for carbon content. The fourth stage of the manufacturing process is ‘Cutting and Sealing’ of Geomembrane Fabrics wherein two or more pieces of Geomembrane fabrics are cut to size or length and thereafter used to make the Geomembrane for pond liner by carrying out the process of sealing /joining them together by a suitable heat air blower sealing process keeping an overlap as per standard sealing process.”

The ld. AAR made reference to chapter 5911 which covers Textile products and articles, for technical uses, specified in Note 7 to this Chapter.

The ld. AAR made reference to judgment in case of Porritts and Spencer (Asia) Limited, reported in 1983 (13) ELT 1607 (SC) = 2002-TIOL-2707-SC-CT -1978-VIL-03-SC wherein it is held that when yarn, whether cotton, silk, woollen, rayon, nylon or of any other description or made out of any other material, is woven into fabrics, what comes out is a textile.

The ld. AAR observed that the fabrics woven out of the HDPE tapes are laminated on both sides, along with sandwich lamination, wherever required, with the suitable combination of specific thickness LDPE Film, LLDP Bonding, UV Stabilizer, some other additives and black masterbatch for carbon content.

Referring to General Rules of Interpretation of the Tariff, the ld. AAR observed that in the instant case. Chapter Heading 5911 clearly envisages the use/functionality test for determination of classification of products under this heading in as much as the tariff heading itself mentions that textile products and articles, for technical uses, will be classified under the said heading.

The ld. AAR also made reference to certain decided cases related to same product given by High Court and different AAR.

In view of above, the ld. AAR passed following ruling:

“Question 1: What is the HSN code for GEO MEMBRANCE laminated HDPE woven polymer lining?

Answer: – Geo Membrane for Water Proof Lining is classifiable under Tariff item 59111000.

Question 2: What is the GST Rate on GEO MEMBRANCE laminated HDPE woven polymer lining?

Answer: – GEO MEMBRANCE laminated HDPE woven polymer lining attract @ 12% GST.

Goods And Services Tax

HIGH COURT

16. (2025) 27 Centex 331 (Gau.) DNA Aggrotech Pvt. Ltd. Vs. State Of Assam

Dated 21st March, 2025

Mere issuance of attachment regarding determination of tax, along with the summary of SCN in DRC-01, cannot be a substitute for issuance of SCN.

FACTS

Petitioner was served with only a summary of the SCN in Form GST DRC-01, along with a statement of tax determination without issuing a proper SCN providing any basis or reasoning for issuance of such SCN. Due to the absence of a detailed SCN, the petitioner was unable to effectively respond. Thereafter, Respondent proceeded to pass the order confirming the demand solely based on summary of SCN in DRC-01. Hence petitioner filed this Writ.

HELD

The Hon’ble High Court observed that a “Statement of SCN” issued in Form DRC-02 as well as Summary of SCN in Form DRC-01 cannot substitute the requirement of issuance of SCN. It is the legal requirement as per section 73 of CGST Act read with Rule 142 of CGST Rules, 2017 and precedent condition prior to passing any order. Accordingly, Impugned Order was not sustainable in the eyes and was set aside.

17. (2025) 26 Centax 241 (Guj.) Infodesk India Pvt. Ltd. vs. Union of India

Dated: 2nd January, 2025

Refund of unutilised ITC cannot be denied as software consultancy services supplied by wholly owned subsidiary to its foreign holding company qualify as “export of services”.

FACTS

Petitioner was engaged in providing software consultancy services exclusively to its foreign holding company. Petitioner filed a refund application of unutilised ITC treating it as “export of services”. Respondent rejected the claim of petitioner stating that such services are classified as “intermediary services” and consequently refused to sanction refund. Being aggrieved by such rejection, the petitioner filed this Writ Petition before the Hon’ble High Court.

HELD

The Hon’ble High Court observed that the petitioner had rendered services to its foreign holding company in an independent capacity and on a principal-to-principal basis. Accordingly, the Court held that such services qualified as “export of services” and did not fall within the scope of “intermediary services.” Therefore, the rejection of the refund claim was not sustainable, and petition was disposed-off in favour of petitioner.

18. (2025) 27 Centax 292 (Del.) Nand Kishore Gupta vs. Additional Director General, Directorate General of GST Intelligence

Dated 17th December, 2024.

Proper officer is legally not empowered to seize currency or valuable assets merely on the ground that they constitute unaccounted wealth since they are not relied under any proceedings under GST Law.

FACTS

Respondent carried out a search and seizure operation at the petitioner’s premises. This was done as part of an investigation into alleged fake ITC claims by a third-party entity. During the search, cash amounting to ₹23,50,000/- and silver bars were seized on the grounds of being unaccounted assets. Aggrieved by such seizure, the petitioner approached the Hon’ble High Court, challenging the legality of the action by way of a writ petition.

HELD

The Hon’ble High Court held that the seizure of cash and silver bars was beyond the scope of powers under section 67 of the CGST Act, 2017 by considering the legislative intent of being relevant to any proceedings. It further observed that the power of seizure under this provision is confined to documents, books, or other devices where such information or records is stored and relevant to the investigation of tax evasion, and the meaning of “things” does not extend to currency or valuable assets by applying purposive interpretation. Consequently, the Court directed the respondent to release the seized cash and silver bars along with applicable interest.

19. (2025) 27 Centax 81 (Jhar.) BLA Infrastructure Pvt. Ltd. vs. State of Jharkhand

Dated 30th January, 2025.

Refund claim of statutory pre-deposit filed after two years of appeal decided favourably cannot be rejected as time limit stated under section 54 of CGST Act is discretionary. Government does not have right to retain the same as per Article 265 of the Constitution of India.

FACTS

An order confirming GST demand for mismatch between GSTR 1 and GSTR 3B was passed in September 2019 under section 74 of CGST Act, 2017. Against this order, petitioner filed an appeal and deposited 10% of the disputed tax as a statutory pre-deposit. The appeal was allowed in petitioner’s favour, and Order-In-Appeal in Form APL-04 was issued on 10th February, 2022. Subsequently, on 11th September, 2024, petitioner filed a refund application for the pre-deposit made at the time of filing the appeal. However, Respondent rejected the application on the ground that it was filed beyond the two-year period prescribed under section 54(1) of the CGST Act, 2017. Hence challenging the rejection, the present petition is made.

HELD

The Hon’ble High Court held that refund of the statutory pre-deposit is a vested right of the assessee, once the appeal is decided in its favour. Further, application for refund of pre-deposit made beyond the period i.e. 2 years from the date of communication of appellate order cannot be rejected on the basis of time bar as per section 54(1) of the CGST Act, 2017 by reading ‘may’ as ‘shall’ looking into the intent of legislature by relying Rakesh Ranjan Shrivastava vs. State of Jharkhand [2024] 4 SCC 419 and Lenovo (India) (P.) Ltd. vs. Jt. Commissioner — 2023 (79) G.S.T.L. 299 (Mad.). The Court in its analysis stated that such rejection of refund and retention of money would defeat the purpose of Article 265 of the Constitution of India which restricts Government to levy and collect tax without authority of law and resulting in conflict with the Limitation Act. Accordingly, the High Court allowed the petition and instructed the Respondent to process the refund application. .

20. [2025] 174 taxmann.com 475 (Jharkhand) Sri Ram Stone Works vs. State of Jharkhand

Dated 9th May, 2025

Notices issued under section 61 of the JGST Act, 2017, comparing the petitioners’ declared sale prices with prevalent market rates were held to be beyond jurisdiction, as section 61 is limited to identifying discrepancies within filed returns. The Court further held that unless transactions of sale are shown to be sham transactions, the mere fact that the goods were sold at a concessional rate / rate less than the market price would not entitle the Revenue to assess the difference between the market price and the price paid by the purchaser as transaction value.

FACTS

Petitioners are engaged in the business of selling stone boulders, stone chips, etc. to various customers. In exercise of powers under section 61 of JGST Act, 2017, notices were issued to petitioners stating, in substance, inter alia, that petitioners have sold stone-boulders/stone chips at a price less than the prevalent market price and, accordingly, petitioners were directed to show cause as to why proceeding under section 73/74 be not initiated against them.

The petitioners challenged the validity of the notices, arguing that the issuance of GST-ASMT-10 notices under section 61, in conjunction with Rule 99 of the JGST Rules, was beyond the jurisdiction of the authorities. They contended that the notices did not highlight any discrepancies within their filed returns but rather relied on their own disclosed figures. The notices then sought to compare these declared prices with market rates, which the petitioners argued were outside the scope of Section 61.

HELD

The Hon’ble Court held that the objective of section 61 is to enable an Assessing Officer to point out discrepancies and errors occurring in the return filed by a registered person with the related particulars. In the present case, instead of pointing out discrepancies in the returns filed by writ petitioners, the competent officer has embarked upon an exercise of comparing the price at which petitioners have sold their stone-boulders/stone-chips with that of prevalent market price and, thereafter, accordingly, issued notices to writ petitioners asking them to show cause as to why appropriate proceedings for recovery of tax and dues be not initiated against them. The Court therefore held that notices issued comparing the particulars at which petitioners have sold their goods with that of the prevalent market price are wholly without jurisdiction and beyond the scope of section 61 of the Act. It is settled law that unless transactions of sale are shown to be sham transactions, the mere fact that the goods were sold at a concessional rate/rate less than the market price, would not entitle the Revenue to assess the difference between the market price and the price paid by the purchaser as transaction value.

21. [2025] 174 taxmann.com 474 (Andhra Pradesh) Kishor Kumar Reddy vs. Deputy Assistant Commissioner of State Tax

Dated 30th April, 2025

In absence of a signature and DIN number on the assessment order, the Court set aside the order and attachments and directed the State Tax Officer to proceed afresh after giving notice and by assigning a DIN number.

FACTS

The petitioner was issued an assessment order by the Deputy Assistant Commissioner of State Tax, followed by notice in Form GST DRC-16 directing the attachment of the petitioner’s immovable property. The properties of the petitioner were attached. These orders were challenged by the petitioner. The assessment order, in Form GST DRC-07, was challenged by the petitioner on various grounds, including the ground that the said proceeding does not contain the signature of the assessing officer and also DIN number, on the impugned assessment order.

HELD

Relying upon various judgments, the Hon’ble Court held that the absence of the signature of the assessing officer on the assessment order would render the assessment order invalid. As regards the issue of non-mentioning of the DIN on the assessment order, the Hon’ble Court referred to CBIC circular No.128/47/2019-GST dated 23rd December, 2019 and the order of Hon’ble Supreme Court in the case of Pradeep Goyal vs. Union of India & Ors 2022 (63) G.S.T.L. 286 (SC) to hold that due to non-mentioning of DIN number and absence of the signature of the assessing officer, the impugned assessment order and consequent attachment would have to be set aside. The Court directed the State Officer to conduct a fresh assessment, after giving notice and by assigning a DIN number and signature to the said order.

22. [2025] 174 taxmann.com 114 (Allahabad) Arena Superstructures (P.) Ltd. vs. UOI

Dated 22nd April, 2025

The assessment orders and demand issued to the assessee after the approval of the Resolution Plan by the NCLT are liable to be quashed.

FACTS

The petitioner went into a Corporate Insolvency Resolution Process. As per the procedure, the creditors were asked to submit their claims before the Resolution Professional. The specific notice was also sent to the G.S.T. department by the Resolution Professional to the petitioner. On 19th July, 2022, the Resolution Plan was approved by the NCLT. The impugned order for the Assessment Year 2017-18 was passed on 4th February, 2025, i.e. after the Resolution Plan was approved by NCLT.

HELD

Relying inter alia upon the decisions in the cases of (i) N.S. Papers Ltd. vs. Union of India [Writ Tax No. 408 of 2021 dated 11-12-2024] and (ii) Vaibhav Goyal vs. Deputy Commissioner of Income Tax [Civil Appeal No. 49 of 2022, dated 20-3-2025] [2025 172 taxman.com 601 (SC], Hon. High Court held that as per the law laid down by Hon’ble Supreme Court, the principle is crystal clear that once the Resolution Plan has been approved by the NCLT, all other creditors are barred from raising their claims subsequently, as the same would disrupt the entire resolution process. The Court therefore quashed the assessment orders and demand notices passed under section 74 of the CGST/UPGST Act, 2017.

23. [2025] 174 taxmann.com 629 (Calcutta) Kuddus Ali vs. Assistant Commissioner of Central Tax

Dated 28th April, 2025

When self-assessed tax declared in the statement of outward supplies furnished under section 37 is included for payment in returns filed under section 39 of the CGST Act, there cannot be the direct recovery of the disputed demand by resorting to section 75(12) of the CGST Act.

FACTS

A notice in Form ASMT 10 dated 20th September, 2024 was issued, identifying certain discrepancies in the returns filed by the pointing out short payment of duty arising out of a difference between tax payable as per declarations in GSTR-9. The petitioner responded, explaining that it had mistakenly disclosed a higher liability of IGST in GSTR-9 and the correct liability is disclosed in GSTR-9C. The petitioner admitted delay in filing of GSTR-3B returns and sought payment of interest in instalments. The orders were passed and the GST authorities proceeded to recover the aforesaid amount by invoking the provisions of section 75(12) of the said Act.

HELD

The Hon’ble Court clarified that “self-assessed tax” under section 75(12) of the CGST Act includes tax payable on outward supplies furnished under section 37 but not included in the return under section 39. In this case, the petitioner’s self-assessed tax under section 37 was duly included in the returns filed under section 39, and the respondents did not dispute this. Consequently, the Court held that section 75(12) could not be invoked once the self-assessed tax under section 37 is incorporated in the returns under section 39, as per the explanation to the provision. Furthermore, since the proceedings were initiated under section 61 and the petitioner’s explanation was not accepted by the department, the Court ruled that the appropriate course of action must be under sections 65, 66, 67, 73 or 74, rather than section 75(12) of the CGST Act.

The Court therefore set aside the recovery proceedings and directed the petitioner to treat the recovery orders as show cause notices and respond thereto.

Doctrine of Mutuality under GST

Doctrine of Mutuality – Young Men’s Case & Constitutional Amendment

Indirect taxes, in general, are transactional taxes. This necessarily means that a tax can be levied only when two people exist in a transaction, since a person cannot transact with himself. The Constitution Bench upheld this legal position in the case of Jt. Commercial Tax Officer vs. Young Men’s Indian Association [(1970) 1 SCC 462]. The issue before the Court was the applicability of sales tax on supplies made to member clubs. In this case, the Court concluded that:

  •  In the case of member clubs, the members are the joint owners. The agency theory would apply in such cases, and the club shall be treated as acting as an agent. It cannot be said that a transfer of property in goods takes place from the club to the members and hence, no sales tax can be levied on the recoveries made by the club from its’ members.
  •  This principle will not apply in the case of proprietary clubs, where not all the members are the shareholders, and vice versa, all the shareholders are not members. In such cases, the members are not the owners or interested in the club’s property.

Subsequently, Article 366 (29A) was inserted to the Constitution in 1983 (46th Constitutional Amendment) to provide that the tax on the sale or purchase of goods shall include a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration deeming such supply to be a sale of goods.

CALCUTTA CLUB’S CASE

Even after the 46th Constitutional amendment, whether the doctrine of mutuality would apply to sales tax was not settled and the matter was again litigated in the context of both, sales tax & service tax and ultimately, settled by the Hon’ble Supreme Court in State of West Bengal vs. Calcutta Club Ltd. [2019 (29) G.S.T.L. 545 (S.C.)]. It was the Revenue’s argument that the 46th Constitutional Amendment permitted the States to levy sales tax on supplies made by an unincorporated association or body of persons to their members. It was also argued that incorporated members’ clubs were always liable to sales tax and were not covered by the decision in Young Men’s.

The Supreme Court, rejecting the above arguments, held that:

a) The principle of mutuality continued to apply  even after the 46th Constitutional Amendment. A transaction which is not covered by Article 366  (29A) would have to qualify as sales within the meaning of the Sale of Goods Act, 1930 for the levy of sales tax.

b) The decision in Young Men’s applied to unincorporated members’ clubs as well as incorporated members’ clubs.

c) In the context of incorporated members’ club, the court held that mutuality would continue to apply when the incorporated bodies do not have shareholders, do not declare dividends, or distribute profits, and such clubs cannot be treated as separate in law from their members.

d) The court further held that clause 29A would not apply to incorporated bodies. The court also rejected the argument that incorporated clubs would be classifiable as a “body of persons”. It held that the term “person” as defined under the General Clauses Act, 1857, specifically included within its scope, a company, or an association, or a body of individuals. If clause 29A was intended to be applied to incorporated bodies, the amendment would have referred to “person” and not “body of persons”.

e) The Court further held that clause 29A would not apply even to unincorporated clubs since no consideration was involved. It was held that the term “consideration” requires money changing hands from one person to another. Since two people are not involved, there is no consideration. The Court also relied on the decisions rendered in the context of Income Tax to support its conclusion (ITO vs. Venkatesh Premises Co-op. Society Limited [(2018) 15 SCC 37].

The Court also dealt with the levy of service tax on incorporated members’ clubs, either incorporated u/s 25 of the Companies Act, 1956, or registered co-operative societies under various State Acts. The Court held that during the period up to 30.06.2012, no service tax was leviable on the incorporated member’s club since the definition of “club or association” u/s 65 (25a) specifically excluded anybody established or constituted by or under any law for the time being in force. The Court also held that the doctrine of mutuality shall apply to service tax. Hence, explanation 3 to the definition of persons deeming an unincorporated association or body of persons and their members as distinct persons would not apply to incorporated member clubs.

GST SCENARIO

The 101st Constitutional Amendment overhauled the Indian indirect tax landscape in 2017. This amendment provided special provisions for the levy of Goods & Service Tax. The term ‘goods and service tax was defined as any tax on the supply of goods, services, or both, except taxes on the supply of alcoholic liquor for human consumption. The term “services” was defined to mean anything other than goods. It must be noted that the Constitutional framework, post insertion of article 246A, did not, in any way, deal with the applicability or otherwise of the doctrine of mutuality. Hence, even after the introduction of GST, the specific challenges to the levy, as applicable under the sales tax/ service tax regime on the grounds of the doctrine of mutuality, continued to exist.

The legislation enacted for the levy & collection of GST (i.e., CGST Act, 2017, SGST Act, 2017, and IGST Act, 2017) provided for the levy of GST on the supply of goods or services or both for consideration in the course or furtherance of business. The term “person” was defined similarly to the definitions under service tax / sales tax. In other words, there was no special provision for the levy of GST on members’ clubs under GST. Therefore, to overcome the Calcutta Club decision, section 7(1) of the CGST Act, 2017 was retrospectively amended & clause (aa) was inserted to include the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration within the scope of supply.

CHALLENGE TO THE RETROSPECTIVE AMENDMENT

It was felt that the amendment was not sufficient to overcome the Constitutional impediment on taxing such transactions for the following reasons:

a) Young Men’s case held that the Constitution did not contain powers for the levy of sales tax on a transaction between a members’ club and its members.

b) Calcutta Club held that the doctrine of mutuality shall apply even after the 46th amendment and no sales tax/ service tax could be levied on members’ clubs. The Court further held that there was no consideration involved in the transaction between a members’ club and its members and therefore, even the 46th amendment would not apply.

c) A mere amendment to the Act was not sufficient to overcome the decision in the case of Young Men and Calcutta Club. The amendment did not deem a member’s club and its members to be distinct. It merely deemed activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, as a supply. A mere amendment to section 7 is not sufficient for the levy provision to trigger. In other words, unless the definition of service is amended to do away with the requirement for duality of person in a service and the Constitution is correspondingly amended, the activities carried out by the members’ clubs cannot be construed as “supply”.

INDIAN MEDICAL ASSOCIATION’S CASE (IMA CASE)

Given the above, the retrospective amendment to section 7 inserting the deeming fiction (clause aa) was challenged before the Kerala High Court. The Single Member Bench of the High Court, in Indian Medical Association vs. Union of India [(2024) 20 Centax 525 (Ker.)], dismissed the writ petition and held that the amendment was neither beyond legislative competence nor offended any fundamental rights guaranteed under Part III of the Constitution.
An intra-court appeal was filed against this decision. The Division Bench in [(2025) 29 Centax 232 (Ker.)] held that when the Constitution has understood a taxable transaction as necessarily involving two persons, the legislature cannot deem a transaction that does not involve two persons as a taxable transaction and to this extent, disagreed with the views of the learned Single Judge who rejected the argument that the amendments had to be invalidated for the reason that it was ultra vires the Constitutional provisions. The Court also drew analogy from the 46th Constitutional amendment to levy tax on deemed sales and concluded that to levy tax on the activities of a members’ club, the constitutional amendment was necessary, and mere amendment to section 7 was not sufficient.

THE WAY FORWARD – LEGISLATIVE PERSPECTIVE

It may be noted that in State of Madras vs. Gannon Dunkerley [2015 (330) E.L.T. 11 (S.C.)], the Supreme Court held that prior to the 46th amendment, the State Governments lacked competency to levy sales tax on works contract since the transactions were not regular sales. This necessitated the parliament to amend the Constitution and insert article 366(29A) to introduce the concept of deemed sales for such transactions, and similar other transactions wherein it was held that the State Legislature lacked constitutional powers to levy sales tax.

Once again, the taxpayers find themselves at the same crossroads. The Supreme Court, in a series of decisions, has held that the doctrine of mutuality shall apply to service tax and sales tax matters. The Kerala High Court, in the IMA case, further extended it to GST. It also struck down the retrospective amendment to be unconstitutional. While it is likely that the Government may file an appeal before the Hon’ble Supreme Court, the other option available to the Government is an amendment. However, unlike the recent attempt of legislative override through a retrospective amendment to Section 17(5) to overcome the Supreme Court decision in the case of Safari Retreats, it may be important to note that in the current case, a mere retrospective amendment to the Act will not remedy the defect. The Government will have to move an amendment to the Constitution.

It may not be out of place to refer to the observations in Calcutta Club wherein the Court made the following observations relating to the 61st Law Commission preceding the 46th amendment:

10. It will be seen from the above that the Law Commission was of the view that the Constitution ought not to be amended so as to bring within the tax net members’ clubs. It gave three reasons for so doing. First, it stated that the number of such clubs and associations would not be very large; second, taxation of such transactions might discourage the cooperative movement; and third, no serious question of evasion of tax arises as a member of such clubs really takes his own goods.

Even if a constitutional amendment takes place, the next question that needs consideration is whether such an amendment would be prospective or retrospective? The GST law, since its introduction, has seen a barrage of retrospective amendments. The Division Bench of the Supreme Court in NHPC Ltd. vs. State of Himachal Pradesh [2023 SCC Online SC 1137] dealt with the law around the adoption of the legislative device of abrogation to remove the basis of a judgement of a court. The Court referred to Tirath Ram Rajendra Nath vs. State of U.P., [(1973) 3 SCC 585], wherein it was held that there is a distinction between encroachment on the judicial power and nullification of the effect of a judicial decision by changing the law retrospectively. While the former is outside the competence of the legislature, the latter is within its permissible limits. The Court also cited Indian Aluminium Co. vs. State of Kerala [(1996) 7 SCC 637] and other catena of judgments wherein the principles regarding the abrogation of a judgment of a Court of law by a subsequent legislation were culled out. In Cheviti Venkanna Yadav vs. State of Telangana [(2017) 1 SCC 283], it was held that the legislature has the power to legislate, including the power to retrospectively amend laws, thereby removing causes of ineffectiveness or invalidity of laws. Further, when such correction is made, the purpose behind the same is not to overrule the decision of the court or encroach upon the judicial turf, but simply enact a fresh law with retrospective effect to alter the foundation and meaning of the legislation and to remove the base on which the judgement is founded….

The Court further held that it cannot interfere with the power to legislate prospectively or retrospectively, provided it is as per the Constitution. Similarly, the legislature can remove the defects pointed out by the Courts, either retrospectively or prospectively. However, if the legislature merely seeks to validate the acts that are struck down or rendered inoperative by a Court by a subsequent legislation without curing the defects in such legislation, the subsequent litigation would be ultra vires. Therefore, it is clear that any retrospective amendment to the legislature to overcome a decision is within the competence of the Government.

The question that needs analysis is whether the constitution can be amended retrospectively. Article 368 deals with the provisions relating to the amendment of the Constitution. Clause (5) thereof provides that there shall be no limitation whatever on the constituent power of Parliament to amend by way of addition, variation, or repeal the provisions of this Constitution under this article. Further, clause (4) provides that a constitutional amendment cannot be questioned in any Court on any ground. It therefore appears that the Parliament has unfettered powers to amend the Constitution, which includes the power to retrospectively amend the Constitution. In fact, there are instances of retrospective amendment of the Constitution, for example, the parts of 1st & 15th amendments & 85th amendment (in toto) were given a retrospective effect. Therefore, a retrospective constitutional amendment cannot be ruled out.

Whether such retrospective Constitutional Amendment can retrospectively validate an amendment to the legislature invalidated by a Court decision? One may refer to the decision in the case of Jayam & Co vs. Asst. Commissioner [(2016) 15SCC 125] wherein it was held that legislatures have the power to pass retrospective laws, but the same cannot be unreasonable or arbitrary. More importantly, if such retrospective amendment has the effect of imposition of a levy, the same is generally frowned upon by the judiciary.

THE WAY FORWARD – TAXPAYER PERSPECTIVE

The doctrine of mutuality is an underlying doctrine applicable to a wide spectrum of associations. Being an indirect tax, any interpretation of non-applicability of GST presents two significant challenges. The first challenge is the loss of input tax credit (both at the association level as well as at the member level). Many business or professional associations procure inputs and input services from third parties, which bear GST. Similarly, members of such business or professional bodies are duly registered and charge GST on the supplies made by them to their clients or customers. Clearly, if such business or professional association wishes to take a position of non-applicability of GST, the input tax credit chain breaks resulting in cascading of taxes.

The second challenge emanates out of the uncertainty and time frame for the resolution of this uncertainty. The Calcutta Club decision took more than two decades to resolve conclusively. In the meantime, an association which takes the position of non-applicability has to bear in mind that it can no longer collect the tax from the member and litigate. As such, the association ends up bearing a risk, the benefit of which risk is derived by the members, rather than the association itself.

However, associations having members who are not covered under the GST law may not see the first challenge and may want to examine the implications of the Kerala High Court decision more closely. For example, the IMA, the litigant in the case of Kerala High Court decision is an association of healthcare professionals who are exempted from payment of GST.

Similarly, take the case of co-operative housing societies. Such societies may wish to examine the grounds of mutuality in addition to the benevolent exemption notification granting a threshold of ₹7,500/- per member per month and may wish to wriggle out of the maze of day-to-day compliances under the GST Law. In fact, in addition to the principle of mutuality, a housing society has a strong case to argue that its activities are not covered within the scope of business. Let us first understand the concept of how a co-operative housing society model functions. A builder develops land by constructing the building and other amenities, sells it to potential buyers who, after the completion of construction and handover of possession, form a society to manage, maintain, and administer the property. The society incurs expenses of two kinds, one being directly incurred for the member (such as property tax, water bill, etc.) and, second being common expenses for all the members (such as lighting of common area, lift operation and maintenance, security, etc.) which are recovered from the members. However, what is of utmost importance is that, unlike an association, a member does not come to society to enjoy the said facilities, but to stay there, which continues to be his right by way of ownership. The same cannot be denied to him. Even if there is a case where a member stops contributing to the expenses, other members of the society cannot deny access to the member to his unit, though the facilities extended may be discontinued.

The term “business” is defined u/s 2 (17) as follows:

(17) “business” includes—

(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);

(c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;

(d) supply or acquisition of goods including capital goods and services in connection with commencement or closure of business;

(e) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members;

(f) admission, for a consideration, of persons to any premises;

(g) services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation;

[(h) activities of a race club including by way of totalisator or a license to book maker or activities of a licensed book maker in such club; and]

(i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities;

So far as the applicability of clauses (a) to (c) to an association/society is concerned, the issue was examined recently in the case of Goa University vs. Jt. Commissioner [(2025) 29 Centax 281 (Bom.)] wherein the Court referred to the decision in the case of Laxmi Engg. Works vs. P.S.G. Industrial Institute [(1995) 3 SCC 583] wherein it is held that the term “commercial activity” means something about commerce or connected with or engaged in commerce; mercantile; having profit as the main aim.

Therefore, the ratio laid down in Laxmi Engg Works and followed in Goa University could apply to such societies, over and above the argument of mutuality and they may continue to be outside the purview of GST since their activities are not in the course or furtherance of business.

CONCLUSION

The doctrine of mutuality lays down an important principle, i.e., a person cannot transact with himself, and the Courts have repeatedly upheld it. However, it appears to be the clear intention of the legislature to bring such transactions within the tax net. It therefore becomes necessary for such clubs/associations/society to take a conscious call on the applicability of GST on their transactions.

GST Implications on Educational Institutions

INTRODUCTION

Education has long been hailed as the great equaliser—the ladder that lets ambitious minds climb to success. But in India, that ladder is getting steeper and pricier. With education costs skyrocketing, quality education has become less accessible for many. Recently, the CEO of a large asset management company shared that the academic expenditure of one child could amount to ₹10 crores in 16 years from now.

Does Goods and Services Tax (GST) on educational services add fuel to the fire? In this article, we break down the impact of GST on educational services, explore its implications for students and institutions alike, and ask the burning question: Should education really be taxed?

Educational activities by schools or colleges have been generally exempted from indirect tax. The term “education” is not defined under the CGST Act 2017 or even under the Constitution of India. But the flyer by the GST Council also refers to the Apex Court decision in Loka Shikshana Trust vs. CIT,1 wherein it was noted that education is a process of training and developing knowledge, skills and character of students by normal schooling.

1 CIT [1976] 1 SCC 25

But before delving into the interpretation nuances of the exemption, it is imperative to understand whether educational activity can be termed as “supply” per se. It is a settled principle that if an activity is outside the scope of the levy, then the discussion on “exemption” is of no relevance.

Whether the education service is covered under the scope of supply for GST purposes?

The GST levy is governed by Section 9 of the CGST Act 2017 and is a tax on the “supply” of goods or services. The definition of “supply” is given under Section 7 of the CGST Act 2017 and has the following attributes:

a. There should be a supply of goods or services.

b. There should be a consideration.

c. The supply is made by a person.

d. The activity should be in the course or furtherance of business.

While all other attributes may be satisfied, the phrase “in the course or furtherance of business” needs some discussion in the context of educational institutions [EI]. If the activity is not in the course or furtherance of business, then it would be outside the scope of “supply”.

In India, EIs generally operate in a “Trust/ Society” model. The objective of setting up such trusts/ societies is to render charitable activities by imparting education. For centuries, learning has been considered a charitable act, a noble pursuit meant to uplift society rather than generate profit. Gurukuls, temples, and community-run schools thrived on donations and goodwill, fostering an ethos that knowledge should be shared, not sold. Providing education from ages six to fourteen was made a Fundamental Right by the insertion of Article 21A in the Constitution of India by the 86th Constitutional Amendment Act, 2002. The National Policy for Education, 1986 and Programme of Action, 1992, envisaged free and compulsory education for all children up to the age of fourteen years.

Keeping aside the civil argument of modern-day EIs being overly commercialised, we should place emphasis on the letter and spirit of the law. The term business is defined under Section 2(17) of the CGST Act 2017 as under (relevant extract):

“business” includes––
(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);

(c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;
………
(i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities;

The term business is defined in an inclusive manner. Sub-clauses (b) and (c) are interdependent on sub-clause (a). Hence, it is important to analyse sub-clause (a), which states that business includes any trade, commerce, manufacture, profession, vocation, adventure or wager. Except for the term “manufacture”, none of the other terms are defined under the CGST Act 2017. To understand the meaning of these terms, reference is made to definitions from Black’s Law Dictionary as under:

Term Meaning Applicability for EI
Trade The act or the business of buying and selling for money. In general parlance, the activity of buying and selling is undertaken with the intention to earn markup or profit from the activity. EI is not primarily engaged in buying and selling.
Commerce The exchange of goods, productions, or property of any kind; the buying, selling, and exchanging of articles. The definition of this term means that the activity should be of buying and selling of things, i.e. goods. EI do not principally deal in the buying and selling of goods.
Profession

 

 

 A vocation or occupation requiring special, usually advanced, education, knowledge, and skill; e.g. law or medical professions. Both these terms relate to activity done by an individual or group of individuals. These terms do not relate to an organisation. The profession and vocation of a person depend upon the educational background, attributes and skill of the person, which cannot be equated with the activities of an organisation. EI is not engaged in any profession and vocation but in fact, imparts education to students who can choose a profession or a vocation based on their own individual calling, attributes and skill.
Vocation A person’s regular calling or business; one’s occupation or profession.
Adventure A commercial undertaking that has an element of risk These two terms mean a chance-based transaction for a reward. It is not at all related to the activities of EI.
Wager Money or other consideration is risked on an uncertain event; a bet, or a gamble.

Thus, it can be argued that educational activity does not fit under the term “business”. In the case of the State of Tamil Nadu and another vs. Board of Trustee of the Port of Madras [1999-VIL-27-SC], it was observed that “The word ‘business’ is wider than the words ‘trade, commerce or manufacture, etc’. The word ‘business’ though extensively used is a word of indefinite import, in taxing statutes, it is normally used in the sense of an occupation, a profession–which occupies time, attention and labour of a person, normally with a profit-motive and there must be a course of dealings, either actually continued or contemplated to be continued with a profit-motive and not for sport or pleasure.”

The Hon’ble Bombay High Court, recently, in the case of Goa University,2 had the opportunity to refer to a catena of decisions explaining that education is fundamental to human existence. We refer to some of those decisions herein. In the Indian Medical Association vs. Union of India3, it was observed that education is one of the principal human activities to establish a humanised order in our country. In the T.M.A. Pai Foundation’s case4, the Hon’ble Court noted that it is the duty of the State to do all it can to educate every section of citizens who need a helping hand in marching ahead along with others.

2 2025 (29) Centax 281 (Bom.)
3  2011 (7) SCC 179
4 2002 (8) SCC 481

The Hon’ble High Court of Rajasthan, in the case of Banasthali Vidyapith,5 highlighted that education is essential for intellectual growth, progressive thinking, and personal development. Furthermore, the Court recognised education as a societal responsibility, crucial for developing mental capacity and fostering humanity. The High Court was deciding on the issue of whether EIs are “dealers” under the erstwhile Rajasthan Value Added Tax Act, 2003 and the definition of “business” thereto included “whether or not such trade, commerce, manufacture, adventure or concern is carried on with a motive to make gain or profit”. Considering this aspect, the Hon’ble High Court of Rajasthan held that “imparting education” cannot be considered as a business.

5  2015 (55) taxmann.com 462 (Rajasthan)

Similarly, in some other cases, it has been held that education cannot be treated as a commercial activity:

a. Education is, per se, an activity that is charitable in nature6.

b. Imparting education cannot be allowed to become commerce. Making it one is opposed to the ethos, tradition and sensibilities of this nation. Imparting of education has never been treated as a trade or business in this country since time immemorial. It has been treated as a religious duty.7

c. Though the fees can be fixed by the educational institutions, and it may vary from institution to institution depending upon the quality of education provided by each of such institutions, commercialisation is not permissible.8

6  State of Bombay v. R.M.D. Chamar Baghwala (AIR 1957 SC 699)
7  Unni Krishnan v. State of Andhra Pradesh (AIR 1993 SC 2178)
8  Modern Dental College and Research Centre and Others [Civil 
Appeals No. 4060 of 2009 before Supreme Court of India]

Although the definition of the term “business” states that activities, “whether or not it is for a pecuniary benefit”, are included, fundamentally, it can be argued that profit-motive is very integral to “business”. The observations from the above judgments lead to a view that education is considered sacred in India. Education is regarded as a necessity for human existence. The very thought of
commercialising education appears to be against the spirit of the nation.

Hence, there is a case to argue that educational activity is outside the scope of “supply” as not being in the course or furtherance of business, and therefore, no GST is payable. It may however, be noted that the said line of argument may not be available in case of entities which are ‘for profit’ (for example, private limited company, LLP or partnership firm).

WHETHER THE EDUCATIONAL SERVICES ARE EXEMPT?

For the sake of further discussion, let us proceed with the notion that educational activity is a supply under GST. In this context, we can jump to Entry No. 66 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, which exempts educational services. While the entry per se provides for a “person” oriented exemption, the nature of “educational services” is embedded in the definition of “educational institution” given in the exemption notification itself.

Entry 66: Services provided –

(a) by an educational institution to its students, faculty and staff;

 

(aa) by an educational institution by way of conduct of entrance examination against consideration in the form of entrance fee;

 

 (b) to an educational institution, by way of,

 

(i) transportation of students, faculty and staff;

 

(ii) catering, including any mid-day meals schemes sponsored by the Central Government, State Government or Union territory;

 

(iii) security or cleaning or house-keeping services performed in such educational institution;

 

(iv) services relating to admission to, or conduct of examination by, such institution;

 

[The above exemption is available for pre-school education and up to HSC or equivalent]

 

(v) supply of online educational journals or periodicals:

 

[The above exemption is not for pre-school education and up to HSC or approved vocational course]

“educational institution” means an institution providing services by way of, –

(i) pre-school education and education up to higher secondary school or equivalent;

(ii) education as a part of a curriculum for obtaining a qualification recognised by any law for the time being in force;

(iii) education as a part of an approved vocational education course;

Further, “approved vocational education course” is also defined in the same notification as under:

(i) a course run by an industrial training institute, or an industrial training centre affiliated to the National Council for Vocational Education and Training or State Council for Vocational Training offering courses in designated trades notified under the Apprentices Act, 1961 (52 of 1961); or

(ii) a Modular Employable Skill Course, approved by the National Council of Vocational Education and Training, run by a person registered with the Directorate General of Training, Ministry of Skill Development and Entrepreneurship;

On a plain reading of the definition, it is understandable that the scope of “educational institution” is based on the curriculum and courses offered. The opening line contains the phrase “by way of” which restricts the scope to institutions that impart education. The institutions that give training to students for getting the education from schools/colleges will not get covered. In other words, while education imparted by schools and colleges themselves is covered, education by private coaching classes, tuitions, etc., is not covered.

The exemption is given to:

  •  Educational services for pre-school and up to higher secondary. This means that schools and colleges up to higher secondary are exempt under this limb.
  •  Educational services for obtaining a qualification only if the said qualification is recognised by any law in force. This means that only recognised courses are exempt. Most of the universities are created under a Central Act or a State Act. The courses offered by such Universities would get an exemption. It should be noted that section 22(1) of the University Grants Commission Act, 1956, provides for the right of conferring or granting degrees only by a ‘university’ or a ‘deemed university’.
  •  Educational services as a part of an approved vocational education course. The scope of the exemption is restricted to vocational courses that are specifically affiliated or notified.

The services provided by EI to students/ faculty/ staff are exempt. By the very fact that the exemption is given not only for services provided to students, but also to faculty/ staff, it is evident that the scope of this exemption is intended to be wider. Further, as explained earlier, the exemption is “person-driven”, and therefore, all services provided by EI should be exempt, even if some of the services are not direct in the nature of imparting education. Some of the clarifications issued by the Govt. place emphasis on this aspect:

Circular No. The crux of the clarification
85/04/2019-GST
dated 01.01.2019		 Supply of food and beverages by an educational institution to its students, faculty and staff is exempt.
177/09/2022-TRU

dated 03.08.2022

 The amount or fee charged from prospective students for entrance or admission, or for issuance of eligibility certificate to them in the process of their entrance/admission, as well as the fee charged for issuance of migration certificates by educational institutions to the leaving or ex-students, is covered by the exemption.

The above Circulars make it clear that the ambit of exemption should be construed having regard to the purpose and object it seeks to achieve. The Circular dated 03.08.2022 even extends the exemption to ex-students or prospective students. The schools or colleges generally have a variety of different charge heads for fee recovery. The scope of exemption would not only include admission / tuition fees but also charges like computer fees, extra-curricular fees, duplicate identity card fees, hostel fees, bus fees, library fees, workshop/ conference fees, etc. The purpose is to give GST exemption for the entire gamut of educational services.

WHETHER THE AFFILIATION SERVICES ARE COVERED?

The question arises whether the exemption is available only to “schools and colleges” or whether it can be extended to “Govt. Education Boards” and “Universities”. This doubt arises because the act of imparting education and training is undertaken by “schools and colleges”. The “Govt. Education Boards / Universities” give recognition to the curriculum/ course / institution, and then recover affiliation fees from the “schools and colleges”. It is also important to note that the purpose of providing affiliation by “Govt. Education Boards/Universities” is to monitor and ensure whether the institution possesses the required infrastructure in terms of space, technical prowess, financial liquidity, faculty strength, etc.

The Govt. issued a clarification vide Circular No. 151/07/2021-GST dated 17.06.2021 and stated that GST at 18% is payable for accreditation services provided by Education Boards. However, the GST Council exempted affiliation services provided by a Central or State Educational Board to “Government schools” and w.e.f. 10.10.2024 Entry No. 66A was introduced in the exemption Notification no. 12/2017. However, the exemption was very restrictive and only applicable for affiliation services to Government schools. The Govt. clarified vide Circular No. 234/28/2024-GST dated 11.10.2024 that affiliation services (other than to Govt. schools) provided by universities and educational boards to their constituent schools/ colleges are not covered within the ambit of exemptions because affiliation services are not related to the admission of students to such schools or the conduct of examinations by such schools.

The Hon’ble Karnataka High Court gave a decision on this subject under the service tax regime, in the case of Rajiv Gandhi University of Health Sciences9. It was held that Universities are established by the State for furthering the advancement of learning and pursuing higher education and research. The High Court noted that Universities regulate the manner in which education is imparted in the Colleges and also conduct examinations. Thus, it was concluded that services provided by the University by collecting affiliation fees should be considered as services by way of education as a part of a curriculum for obtaining a qualification recognised by any law.

However, the Hon’ble Telangana High Court, in the case of Care College of Nursing vs Kaloji Narayana Rao University of Health Sciences,10 stated that the exemption is not available to the Universities because the inspection of an institution is conducted and the affiliation is thereafter granted. The High Court held that the admission and the services rendered by the EIs to the students, the faculty and the staff are all services rendered subsequent to the affiliation. The Hon’ble High Court, in its determination, placed reliance on Circular No. 151/07/2021-GST dated 17.06.2021. However, the Court did not undertake an analysis regarding the status of Education Boards/Universities as statutory bodies, nor did it examine whether such entities are engaged in any business activities in the strict sense of the term. It should also be noted that this case was between the college and the university. The tax department was not a part of this case, and the Hon’ble Court also relied on the fact that the University did not object to the payment of tax.

9 2022 (64) G.S.T.L. 465 (Kar.)
10  2023 (12) Centax 216 (Telangana)

This judicial tug-of-war sent mixed signals, leaving everyone scratching their heads. This issue recently came before the Hon’ble Bombay High Court in the case of Goa University11. The Hon’ble High Court observed:

  •  The fees collected by the University are not a consideration as contemplated in section 7 of the CGST Act 2017. The fees are collected in the nature of statutory fees or regulatory fees in terms of the statutory provisions and are not contractual in nature. The same cannot be given a colour of commercial receipts, as there is no element of commercial activity involved in the subject transaction.
  •  The University is actively involved in imparting education to students, and it acts as a regulator of education. The Circular dated 11.10.2024 is erroneous. Affiliation is essentially an activity relating to the admission and examination of students.
  •  The university is also an educational institution and students of the university include students studying through affiliated colleges. Affiliation services by universities are exempt under clause (a) of entry no. 66.

Interestingly, the Hon’ble Court held that the university and colleges, both provide educational services to the same student. The Court also emphasised that affiliation enables the institution to secure qualifications. Moreover, it was also held that the affiliation fee is a statutory levy and, therefore, not a consideration.

The decision of the Hon’ble Bombay High Court appears to be a better proposition and more aligned with the overall object of exempting educational services.

11 2025 (29) Centax 281 (Bom.)

WHAT IS THE TAXABILITY ON FEES PAID FOR ENTRANCE EXAMINATIONS?

The second limb of the exemption is specifically applicable to the entrance examination. Some institutions only conduct examinations and do not impart education per se. Under the service tax regime, an exemption similar to clause (aa) did not exist, and there was a view that the entrance examination services would fall under clause (a) itself. Arguably, examination is integral to education as it is one of the major means to assess and evaluate the skills and knowledge of a candidate. However, it appears that the government intended to avoid such interpretational issues, and a specific exemption is given under the GST regime.

The Government also sets up certain boards or authorities (like the National Board of Examination or National Testing Agency) for the conduct of examinations. There were doubts about the applicability of GST for the fees collected by such boards/ agencies. In fact, the National Board of Examination even collected GST from the students. The Govt. then issued a clarification vide Circular No. 151/07/2021-GST dated 17.06.2021 that the National Board of Examination is a central educational board, and thereafter, an Explanation (iva) was introduced in the Exemption Notification on 28.02.2023 to clarify that any authority, board or body set up by the Central Government or State Government for conduct of entrance examination shall be treated as EI. In the case of the National Board of Examination, the Hon’ble Delhi High Court12 instructed to refund GST to all the students.

12 2024 (14) Centax 201 (Del.)

WHETHER THE EXEMPTION IS PERSON-DRIVEN OR ACTIVITY-DRIVEN?

It is apparent from entry no. 66 that GST exemption is available to the “institution” for services to students, faculty and staff. The exemption entry is not based on the nature of services. The nature of “educational services” is implanted in the definition of “educational institution”. This could mean that if an institution primarily satisfies the definition of “educational institution”, then all its activities are exempt. This interpretation was taken by the Hon’ble High Court in the case of Madurai Kamaraj University,13 wherein it was held that allied services like renting of immovable property for purposes of bank, post office, canteen, etc., are included in the purview of educational services. Though the said decision was under the service tax regime but, the exemption entry under the GST regime is similarly worded. It should also be noted that the Hon’ble Court placed more emphasis on the “educational institution” instead of the “service recipient”. The first part of the exemption says that services provided to “students, faculty or staff”. In renting of immovable property for purposes of bank, post office, canteen, etc., the service recipient is not a student/ faculty/ staff. However, a purposive interpretation was made by the Court, and the argument of the petitioner was accepted that within the campus of the university, there are a number of students, teaching and non-teaching faculties and in order to provide the basic services, the bank, post office and canteen and those services in view of the expanded meaning provided under exemption notification.

However, in the context of income tax, the Hon’ble Apex Court has observed in the case of New Noble Education Society14 that where institutions provide their premises or infrastructure to other entities for conducting workshops, seminars or even educational courses (which the institution concerned is not actually imparting) and outsiders are permitted to enrol, then the income derived from such activity cannot be characterised as part of education or incidental to imparting education.

Based on the above decision (though in a different context), it appears that the allied or incidental activity should have a nexus with the educational activity of the concerned institution.

13 2021 (54) G.S.T.L. 385 (Mad.)
14 2023 (6) SCC 649

WHAT IS THE SCOPE OF EXEMPTION FOR SERVICES RECEIVED BY THE EDUCATIONAL INSTITUTION?

We now proceed to discuss the second basket of exemption which is from the perspective of inward supplies of EI. The purpose is to ensure that EI is not burdened with ineligible input tax credits on account of outward supplies being exempt.

This exemption is again bifurcated into two categories: a) services procured for pre-school education and up to HSC or equivalent, b) services procured for education for obtaining a qualification [not for pre-school education/ up to HSC/ approved vocational course].

The first category exemption is for the following services provided to EI:

  •  transportation of students, faculty and staff;
  •  catering, including any mid-day meals schemes sponsored by the Government;
  •  security or cleaning or house-keeping services;
  •  services relating to admission to or conduct of examination

The above exemptions are specific and only available when such services are provided to EI for pre-school education and up to HSC or equivalent. The exemption is not available if the service providers directly provide services to students, faculty or staff. In the case of Batcha Noorjahan15, the Advance Ruling Authority [AAR] categorically highlighted that exemption would not be available when consideration towards transportation activity was received by the applicant from students, and no consideration was received from school administration (even though the lease agreement was entered with school administration).

15 2025 (174) taxmann.com 130 (AAR – Tamil Nadu)

The services of catering, security, cleaning and house-keeping are apparently exempt. With respect to catering and mid-day meal scheme, the Govt. has clarified vide Circular No. 149/05/2021-GST dated 17th June, 2021 that “Anganwadi” provide pre-school non-formal education and serving of food to “Anganwadi” shall also be covered by above exemption, whether sponsored by the Government or through donation from corporates.

For “admission to or conduct of examination”, the phrase “in relation to” has been used, thereby expanding the scope of exemption entry. This means that in addition to admission / examination services, the exemption is available for services that are “connected” with admission/ examination services. This would include (i) pre-examination items such as printing of registration certificates, examination enrolment forms, and admit cards, ii) printing of exam papers, answer booklets, developing/ managing web applications for conduct of online examinations, iii) post-examination services of processing of examination results, generation and printing of mark sheets/ pass certificates. This position is also clarified vide Circular No. 151/07/2021-GST dated 17.06.2021.

The last limb of exemption for the supply of online educational journals/periodicals to EIs who provide recognised degree courses. The said exemption is not for services procured by pre-school education/ up to HSC/ approved vocational course.

It should be noted that online journals/ periodicals are generally accessed from websites / web-based applications by paying a subscription fee. An annual subscription fee is paid for access to the entire online database of journals/ periodicals. The CBIC press release dated 18.01.2018 also stated that the intention is to exempt the subscription of online educational journals/periodicals. Despite such clarity, the AARs have given contrasting rulings on this subject. In Manupatra Information Solutions Pvt. Ltd.16, AAR has held that exemption is not available for the subscription fee charged from EI to gain access to data available in the database and to download articles or information. In Informatics Publishing Ltd.17, Appellate AAR has held that a subscription by EI for access to a website providing access to millions of journals published across the world on various areas of study is exempt.

16 2023 (3) Centax 244 (A.A.R. - GST - U.P.)
17 2020 (40) G.S.T.L. 281 (App. A.A.R. - GST - Kar.)

CONCLUSION

Education in India has always been more than just a service — it’s a revered institution, a sacred tradition deeply woven into the country’s cultural and philosophical fabric. It is necessary that suitable clarifications are issued to avoid unwarranted toll on the pursuit of knowledge.

Recent Developments in GST

A. NOTIFICATIONS

i) Notification No.11/2025-Central Tax dated 27th March, 2025

By above notification, Rule 164 of CGST Rules, which is regarding waiver scheme granted u/s.128A, is amended to bring more clarity to the scheme.

ii) The Finance Act, 2025 (Act No.7 of 2025) dt. 29th March, 2025 has been enacted. Various amendments proposed in the Budget 2025 are incorporated in this Act.

B. CIRCULARS

(i) Clarifications on GST Amnesty Scheme u/s. 128A of CGST Act – Circular no.248/05/2025-GST dated 27th March, 2025.

By above circular, clarifications about GST amnesty scheme u/s.128A of the CGST Act, 2017 are provided.

C. ADVISORY

i) Vide GSTN dated 16th March, 2025, the information about Biometric based Aadhaar Authentication and Document Verification for GST Registration Applicants of Uttar Pradesh is provided.

ii) Vide GSTN dated 3rd March, 2025, the information regarding Enhancements in Biometric Functionality for allowing Directors to opt for Biometric Authentication in Their Home State is provided.

iii) Vide GSTN dated 21st March, 2025, an advisory has been issued in relation to filing of application (SPL01/SPL02) under waiver scheme and to clarify that if the payment details are not auto-populated in Table 4 of SPL 02, it is advisable to verify the same in electronic liability ledger on the portal.

iv) Vide GSTN dated 2nd April, 2025, the information about Biometric based Aadhaar Authentication and Document Verification for GST Registration Applicants of Assam is provided.

v) Vide GSTN dated 4th April, 2025, the information about the change in Invoice Reporting Portal (IRP) vis-à-vis generation of Invoice Reference Number (IRN) is provided..

D. ADVANCE RULINGS

CBIC, vide Instruction No. 03/2025-GST, dated 17th April, 2025, issued Instructions regarding processing of applications for GST registration. Thus, comprehensive instructions have been issued now to take care of the latest developments and to provide clarity to the officers for processing of registration application.

E. ADVANCE RULINGS

Composite Supply – Renting charges with separate electricity charges. Duet India Hotels (Hyderabad) Pvt. Ltd. (AAAR Order No. AAAR/02/2025 Dated: 20th February, 2025) (Telangana).

The facts are that Duet India Hotels (Hyderabad) Private Limited (Lessor) (Appellant) are engaged in the business of running hotels. M/s. The Curry House Food’s Private Limited (“Lessee”) is engaged in the business of operation of restaurants. A Leave and License Agreement (“Agreement”) has been entered between the Lessor and Lessee whereby, the Lessor has granted licence to the Lessee to use the specified area (“Licensed Premises”) of the hotel for operating a restaurant at an agreed consideration called as licence fees.
In addition to the license fees, the Lessor is collecting other charges separately from the Lessee like security charges as well as electricity and water charges. Lessor charged GST on all such collections but lessee objected to pay the GST on electricity and water charges on the ground that electricity and water charges are reimbursement of expenses by the Lessee to the Lessor and these do not qualify as a supply under GST and that even if they qualify as supply, they are exempt from payment of GST.

To resolve issue, appellant had filed application for AR. The AR was decided by ld. AAR bearing Order No: 48/2022 dt: 14th July, 2022 – 2022-VIL-265-AAR.

The members of the ld. AAR differed in their opinion and gave following ruling.

Since the Members of Advance Ruling Authority have expressed differing views as above, the matter was referred to the Appellate Authority (AAAR), in terms of Section 98(5) of CGST/SGST Act, 2017.

The ld. AAAR referred to various clauses in agreement. It was noted that in addition to licence fees there are clauses for bearing of electricity and water charges as per actual by the lessee. The ld. AAAR observed that the provision of facilities like electricity and water etc. are on account of lessor and are for effective and hassle-free enjoyment of the premises. It is observed that the Lessee cannot fully and realistically enjoy the rented / leased premises unless electricity and water are provided. Therefore, supply of electricity and water form part of a composite supply of renting services by the Lessor to the Lessee, held the ld. AAAR.

In this respect the ld. AAAR relied upon CBIC Circular no. 206/18/2023-GST dt: 31st October, 2023 and particularly on Para 3.2.

In this respect, the ld. AAAR also rejected the argument of the appellant that it is acting as ‘pure agent’ as it does not fulfil conditions of Rule 33 of the CGST Rules, 2017.

As per Rule 33 there must be an authorisation by Lessee on Lessor when he makes payment to Electricity Department. However, in the present case, there is no sub-meter in the name of Lessee. Accordingly, the question of Lessee authorising the Lessor to pay the charges does not arise and the prescribed conditions are not fulfilled for lessor (appellant) to be treated as a pure agent, observed the Ld. AAAR.

The further contention of exempt supply of electricity under entry at Sl. No.25 of Notification No.12/2017-CT(R) was also rejected, as appellant is not Transmission or Distribution Licensee under
the Electricity Act, 2003. The ld. AAAR further held that it being a case of composite supply, where ‘renting of immovable property’ is the principal supply, the supply in the present case has to be treated as a supply of service of ‘renting of immovable property’, as per section 8(a) of CGST Act and shall be leviable to tax accordingly and cannot be claimed exempt. Thus the ld. AAAR upheld view of Member-Central and disposed of appeal.

Classification – Aluminium Composite Panels (ACP)/Sheets – HSN 7606 Aludecor Lamination Pvt. Ltd. (AAAR Order No. AAAR/04/2025 Dated: 20th February, 2025) (Telangana).

Regarding issue of classification of above item, the ld. Members of AAR differed in their views while giving AR (Order no.05/2023 dt.12th April, 2023- 2023-VIL-83-AAR).

Therefore, an appeal proceeding was initiated as per section 98(5). The ld. respective members of AAR had passed following order:

In appeal, the ld. AAAR found that though the State Member opined that the said commodity is neither plastic nor aluminium wholly and as such cannot be classified either as plastic or aluminium (hence do not fall under any of the Tariff Headings 3920 or 7604 or 7610), he is silent on correct classification.

The ld. AAAR observed that, on the other hand, the Central Member has examined the matter in detail, in line with rules for interpretation of tariff and various case laws. It is further observed that the ld. Member has followed classification as per “tariff item”, “sub-heading”, “heading”, and “chapter” mentioned in the schedules to the relevant notifications, with further reference to the First Schedule to the Customs Tariff Act, 1975. The ld. AAAR favoured with findings of Central Member and also found that the reasoning of Central Member for holding of product as falling in 7606 is based on various decisions of CESTAT.

The ld. AAAR, accordingly, concurred with Central Member and ruled that the ACP falls in heading 7606.

Classification – Fish Finders vis-à-vis ‘Part’ of Fishing vessel Kunthunath Trading & Investments Pvt. Ltd. (AAR Order No. ARA-23-24/24-25/B-100 Dated: 28th February, 2025) (Mah)

The applicant M/s. Kunthunath Trading & Investments Pvt. Ltd. sought advance ruling in respect of the following question:

“Whether fish finders merit classification as ‘Parts of goods of headings 8901, 8902, 8904, 8905, 8906, 8907’ falling Entry 252 of Schedule I to Notification No. 1/2017 – Central Tax (Rate) dated 28th June, 2017 (as amended from time to time) and taxable at 5%?”

The applicant is engaged in the business of sale and distribution of fish finders.

The fish finder is a device boatmen use to locate fish in the water. They work on the Sound Navigation and Ranging (SONAR) technology. It works by sending sound waves in water. These waves then strike an object and return to the device and relay important information like shape and size of the fish and so on.

The applicant was of opinion that Fish finders form an important part of fishing vessels and
hence merits classification under entry 252 of Schedule-I to Notification no.1/2017- CT (R) dt.28th June, 2017.

In support of its view that product is covered by entry 252, applicant has tried to prove that it is part of given vessel.

The judgments and dictionary meanings were relied upon.

It was emphasised that Fish finders are fitted on fishing vessels for the convenience of finding fishes in deep sea and hence, fish finders should be considered as an essential part of the fishing vessel which is classifiable under Entry 252 of Schedule I of rate notification.

The department objected to the above
submission on ground that a Fish Finder is not typically considered as a necessary part for the manufacturing of fishing vessel but rather an optional accessory or auxiliary equipment. The department supported its view with further explanation.

The ld. AAAR reproduced relevant entry as under:

The fishing vessels are covered by heading 8902.

The ld. AAR first dealt with meaning of ‘part’ as per dictionary.

The ld. AAR observed about nature of product that a Fish finder is a sonar instrument used on boats to identify aquatic animals, underwater topography and other objects by detecting reflected pulses of sound energy, usually during fishing activities. A modern Fish finder displays measurements of reflected sound on a graphical display, allowing an operator to interpret information to locate schools of fish, underwater debris and snags, and the bottom of a body of water.

The ld. AAR observed that Anchor, Bow, Bowsprit, Fore and Aft, Hull, Keel, Mast, Rigging, Rudder, Sails, Shrouds, Engines, gearbox, Propeller, Bridge, etc. are very essential parts of a ship or vessel and are quite clearly parts of a vessel/ship and a ship/vessel cannot be imagined to be in existence without these parts, but there can be additional equipments in a vessel. However, all such addition items cannot be considered to be part.

The ld. AAR further observed that ‘part’ is a separate piece of something or a piece that combines with other pieces to form the whole of something and even the second definition of ‘part’ also defines ‘part’ as one of the pieces that together form a machine or some type of equipment. Considering above scope of ‘part’, the ld. AAR held that Fish finder is not covered by scope of entry 252 and hence cannot be covered by tax rate of 5%.

Classification – “Transformers, Wind Operated Electricity Generators (WOEG),”

Suzlon Energy Ltd. (AAR Order No. GUJ/GAAAR/APPEAL/2024/08 (in application no. Advance Ruling/SGST & CGST/2022/AR/05) DT.30th December, 2024 (Guj)

The present appeal was filed by M/s. Suzlon Energy Ltd. (appellant). The brief facts are as under:

“- The appellant is engaged in supply of goods required for setting, up of power projects enabling generation of power through renewable sources of energy on its own & through its subsidiary companies;

– Appellant manufactures Wind Operated Electricity Generators [WOEG] falling under chapter 85023100; parts like Nacelle, Blades & Towers falling under chapter heading 8503; transformers falling under chapter heading 8504.
– Transformers for WOEG is installed on the ground adjoining WOEG & is a device to link the electricity generated by the WOEG to the distribution grid and make it usable for distribution / consumption;
– The appellant feels that the transformers are specially/specifically designed to be used along with WOEGs & is therefore to be treated as part of WOEG.”

Based on above facts, the appellant had sought Advance Ruling about classification of its product as falling under Sr. No. 234 in Schedule-I to Notification No. 01/2017-Central Tax (Rate) dated 28th June, 2017 liable to GST at the rate of 5% up to 30th September, 2021 and 12% from 1st October, 2021 under Entry No. 201A to Notification No. 01/2017-Central Tax (Rate) dated 28th June, 2017.

The ld. AAR, vide the impugned ruling dated 18.10.2021, held that Transformers are not part of WOEG and are leviable to CGST @ 18% vide Sr. No. 375 of Schedule-III of Notification No. 1/2017-CT (Rate) dated 28-6-2017.

Aggrieved by the aforesaid AR, the appellant has filed this appeal. Before the ld. AAAR, appellant put various contentions including citing of circulars and judgments.

The ld. AAAR observed that a clarification has already been issued on 20.10.2015 vide Circular No.1008/18/2015-CX by the Board, wherein details of parts on which exemption is available is specified.

The ld. AAAR concurred with AAR that transformers have not been included as parts of WOEG by the Ministry of New and Renewable Energy and hence, the contention of the appellant that they are parts of WOEG is not a legally tenable argument.

The ld. AAAR also held that the appellant has not produced any material before them which could lead them to a conclusion that transformer, in terms of their popular meaning /common parlance principle, is part of WOEG.

The ld. AAAR also held that exemption Notification should be read strictly and ambiguity, if any, should be resolved in favour of revenue.

Accordingly, the ld. AAAR held that the specially designed transformer for WOEG, which perform dual function of step down and step up, supplied by the appellant is not a part of WOEG and hence it would not be eligible for the benefit at Sr. No. 234 and Sr. No. 201A of exemption notification No. 1/2017-CT (Rate), as amended. The ld. AAAR confirmed AR and dismissed the appeal.

Time of Supply – Mobilization Advance

S. P. Singh Constructions P. Ltd. (AAR Order No. GUJ/GAAAR/APPEAL/2024/07 (in application no. Advance Ruling/SGST & CGST/2021/AR/04) DT.30th December, 2024 (Guj)

The facts of case are as under:

“- the appellant undertakes EPC [Engineering, Procurement, Construction] contract for construction of bridges & other projects for Government of India/State Government;

– as a sample, EPC contract dated 15th January, 2018, relating to construction of 4 lane Signature bridge between Okha and BeytDwarka on NH-51 is submitted, which has been entrusted by Ministry of Road Transport and Highways New Delhi [‘authority’/MORT&H] to the appellant.

– in terms of the EPC contract, the authority gives an interest-bearing advance equal to 10% of contract price for mobilization expenses, to extent financial assistance to mobilize resources for timely & smooth take off of the project;- this mobilisation advance, is in lieu of counter bank guarantee [BG] of 110% of the advance which would remain effective till completion and full repayment of the advance;

– the payment for construction work is done by the authority on completion of payment stage, as defined in the EPC contract & post this the appellant raises the invoice; a part of the mobilisation advance is reduced in proportion to the value of the work completed, as shown in the invoice; BG is also reduced in proportion to the mobilization advance adjusted in the invoices;
– the appellant, in his books, shows mobilization advance as a non-current liability, which is thereafter provisionally transferred to sale/consideration for service as and when proportionate amount is deducted from the invoices raised on the customers.”

With above facts, the appellant sought Advance Ruling on the question as to what is the time of supply for the purpose of discharge of GST in respect of mobilization advance received by it for construction services.

The GAAR vide Advance Ruling No. GUJ/GAAR/R/2022/06 dt.7th March, 2022- 2022-VIL-91-AAR held as follows:

“We note that SPSC does not contest the taxability on said Advance, but is before us for its deferment from date of its receipt to date of issue of invoice. We pass the Ruling based on Section 13(2) CGST Act read with its explanation (i).

Time of Supply, on said Advances received by SPSC for Supply of its Service, is the date of receipt of said advance.”

In appeal, the appellant made various submission and contentions.

The ld. AAAR noted various clauses about advance payment in EPC contract.

The ld. AAAR also referred to definition of ‘works contract’ in section 2(119) and observed that the EPC agreement between the appellant and MORT & H for construction of new 4-lane signature bridge connecting missing link between Okha and BeytDwarka, is a supply of service.

The ld. AAAR also referred to meaning of ‘consideration’ given in section 2(31), and section 13, which specifies Time of Supply of Services.

Reading sections 2(31) and 13, conjointly the ld. AAAR observed as under:

“liability to pay tax on services shall arise at the time of supply, which will be the earliest of the date of issue of invoice by the supplier, if it is issued within the prescribed period or the date or receipt of payment, whichever is earlier. The explanation to section 13(2) through a deeming, provision states that the supply shall be deemed to have been made to the extent it is covered by the invoice or, as the case may be, the payment & that “the date of receipt of payment” shall be the date on which the payment is entered in the books of account of the supplier or the date on which the payment is credited to his bank account, whichever is earlier. Further, the proviso to section 2(31) goes on to add that a deposit in respect of the supply of services shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply.”

The ld. AAAR referring to clause 19.2.7 of agreement also held that the mobilisation advance/advance payment, is adjusted as a consideration towards the said supply and the proviso to section 2(31) stands satisfied & hence, the mobilisation advance/advance payment is a consideration as defined under section 2(31) of the CGST Act, 2017. Accordingly, the ld. AAAR held that the time of supply in respect of the mobilization advance/advance payment received by the appellant in respect of supply of service, is the date of receipt of such advance.

The benefit sought to be availed by appellant of notification No.66/2017 dated 15th November, 2017, exempting payment of GST on advance paid on goods, also rejected by ld. AAAR, as transaction is of service and not goods.

The ld. AAAR dismissed appeal, confirming ruling of AAR.

Goods And Services Tax

I. SUPREME COURT

6. [2025] 29 Centax 10 (SC) Central Board Of Indirect Taxes And Customs Vs. Aberdare Technologies Pvt. Ltd.

Dated 21st March, 2025.

Right to amend GST returns for rectifying bonafide errors of tax payer beyond the statutory time limit of 30th November cannot be denied where there was no loss to Revenue.

FACTS

Respondent, taxpayer had timely filed its GST returns for the periods July 2021, November 2021 and January 2022. However, certain errors in the returns were noticed in December 2023 and request was made to GST Authorities for rectifying such errors. However, petitioner rejected the request made by respondent stating that deadline of 30th November to allow rectification had already lapsed. Respondent filed a Writ Petition before Hon’ble High Court where rectification of returns was allowed. Being aggrieved, petitioner i.e. the revenue preferred this Special Leave Petition.

HELD

The Hon’ble Supreme Court without interfering with the decision of Bombay High Court held that the respondent has right to correct clerical or arithmetical error when there was no loss to revenue and without proper justification. Software limitations cannot justify denial of corrections as the same can be configured for ease of compliance. Accordingly, Special Leave Petition was disposed of in favour of respondent.

II HIGH COURT:

7. M/s. ShrinivasaRealcon Private Ltd. vs. Deputy Commissioner AE Branch CGST & CE Nagpur & Others Bombay High Court –

Nagpur Bench in Writ Petition 7135/2024 order dated April 08, 2025.

Transfer of Land Development Right : Not covered by Entry 5B of amended Notification 13/2017 –C.T. (Rate) dated 28th June, 2017.

FACTS

a) Petitioner, a builder / developer entered into a development agreement in April, 2022 with landowner in terms of which, the petitioner was granted right to develop a plot of land in question by utilizing its present FSI or any increases thereof. In the execution of the said agreement, the petitioner pleaded that no TDR or FSI was purchased by the landowner or the petitioner from any person or entity. However, the petitioner was first issued a show cause notice dated 24/07/2024 whereby the petitioner was asked to pay GST considering the said transaction as transfer of TDR. The said show cause notice was followed by another show cause notice dated 14/08/2024 by which GST was claimed under Reverse Charge Mechanism on the above transaction by invoking entry 5B of Notification No.13/2017-Central Tax (Rate) dated 28/06/2017 as it stood amended by Notification No.5/2019-C.T, (Rate) dated 29/03/2019. The said Notification provides to impose service tax levy under Reverse Charge Mechanism when services are supplied by any person by way of transfer of development rights (TDR) or Floor Space Index (FSI) (including additional FSI) for construction of project by a promoter.

b) Petitioner contended that the agreement entered into by them with the landowner did not involve any transfer of development right as defined in Regulation 11.2 of Unified Development Control and Promotional Regulations for the State. It is to be noted importantly that GST Act does not define the “Transfer of Development Right” (TDR). At the other end, revenue contended that the agreement and more particularly, a specific clause thereof would contemplate that the transaction with the petitioner was one of transfer by the land owner and hence entry 5B of Notification 13/2017-C.T. (Rate) was attracted.

HELD

The Court observed that in terms of language of the said entry 5B, it relates to services which can be said to be supplied by any person by way of Transfer of Development Rights (TDR) or FSI for construction of a project by a promoter. The expression ‘TDR’ as contemplated by clause 11.2.2 under the regulations for grant of TDR in the Unified Development Control and Promotion Regulations for the State of Maharashtra and clause 11.2.1 of which defines transferable development right to mean compensation in the form of FSI or development rights which shall entitle the owner for construction of built-up area subject to the provisions in the said regulations. It thus follows that TDR/FSI as contemplated by entry 5B cannot be related to the rights which the developer derives from the owner under the agreement of development for constructing the building. This is because the specific clause relied upon by the revenue merely indicates that the owners shall sign and execute a deed of declaration under section 2 of the Maharashtra Apartment Ownership Act, 1970 submitting the entire scheme to the provisions of the said Act and execution of the apartments deeds in favour of individual buyers by the nominees of the developers. Hence the transaction in terms of the agreement does not get covered by entry 5B of duly amended Notification 13/2017-C.T. (Rate) dated 28/06/2017. Accordingly, both the show cause notices as well as the consequent order dated 10/12/2024 cannot sustain and are hereby quashed and set aside. The petition thus is allowed.

8. [2025] 28 Centax 287 (Guj.) Alfa Tools Pvt. Ltd. vs. Union of India dated 06.03.2025.

Assignment of leasehold rights over land is a benefit arising out of immovable property not liable to GST.

FACTS

Petitioner was engaged in manufacturing of cutting tools. In 1978, the petitioner had acquired leasehold rights over an industrial plot from GIDC for 99 years. In 2018, the petitioner transferred such leasehold rights over land for a consideration of ₹75 lacs. Subsequently, petitioner voluntarily applied for cancellation of its GST registration which was duly completed by a registration cancellation order. Subsequent to the cancellation of registration, respondent issued notice demanding GST on such consideration received towards such transfer of leasehold rights. Being aggrieved by such a notice demanding GST, petitioner filed a writ petition before this Hon’ble High Court.

HELD

The Hon’ble High Court after taking into consideration the facts and squarely relying on its decision in the case of Gujarat Chamber of Commerce and Industry vs. Union of India — 2025 SCC Online Guj 537, held that the assignment/transfer of leasehold rights over land represents a benefit arising from immovable property covered by Clause 5 of Schedule III of CGST Act, 2017 not liable to GST. Accordingly, petition was disposed of in favour of petitioner.

9. [2025] 28 Centax 215 (All.) Khaitan Foods India Pvt Ltd. vs. State of U.P. dated 19.02.2025.

Right to appeal cannot be deprived where payment was specifically made under protest for release of goods without accepting the demand.

FACTS

The vehicle carrying petitioner’s goods was intercepted on 29.08.2024 and due to a mismatch between goods and documents, petitioner’s goods were detained and SCN under section 129(1)(a) of the CGST Act was issued proposing a penalty of ₹22,37,220/-. Petitioner responded citing an inadvertent error and sought for release of perishable goods. On 05.10.2024, the petitioner deposited the penalty amount via DRC-03, stating that such payment was made “under protest and without prejudice to our legal right to appeal.” Order levying penalty was passed on 06.10.2024 and goods were released on 08.10.2024. After release of goods a suo-moto rectification order nullifying the demand and treating the payment as voluntary was passed by the respondent. Due to such an action, it hampered petitioner’s right of preferring an appeal option. Being aggrieved by such rectification order, petitioner preferred this writ petition before the Hon’ble High Court.

HELD

The Hon’ble High Court observed that petitioner’s “payment under protest” via DRC-03 preserved its statutory right to appeal against the original penalty order dated 06.10.2024. High Court further ruled that authorities improperly exercised rectification powers under section 161 of the CGST Act by treating the payment as voluntary and converting the demand as ‘Nil’, unlawfully depriving the petitioner of its statutory remedy of appeal. High Court restored the original penalty order dated 06.10.2024 and petitioner’s right to challenge the order imposing penalty.

10. [2025] 28 Centax 238 (Bom.) Xiaomi Technology India Pvt. Ltd. vs. Union of India dated 22.01.2025.

GST authorities from another state cannot raise demand leading to double taxation where stay was already granted by High Court on adjudication of earlier SCN for the same amount.

FACTS

Petitioner received an amount of ₹6,092 crores from its Hong Kong group company during F.Y. 2018-19 and F.Y. 2019-20. Respondent i.e. GST Authority located in Maharashtra State issued a SCN demanding tax of ₹75 crores on part of the same amount received by the petitioner. However, petitioner had already deposited ₹75 crores with the Karnataka GST authorities where the petitioner’s head office was located. Further, a stay had also been granted by the Karnataka High Court against those proceedings. Being aggrieved by demand raised on the portion of same amount under section 74 of the CGST Act, 2017 which was already in dispute, petitioner filed a writ petition under Article 226 of the Constitution of India before this Hon’ble High Court.

HELD

The Hon’ble High Court observed that Karnataka GST Authorities had already initiated proceedings for the entire ₹6,092 crore transaction where 75 Crores was deposited by petitioner and stay on earlier proceedings was granted by the Karnataka High Court. Accordingly, the Bombay High Court granted interim protection by staying further proceedings on the impugned show cause notice with a liberty to modify the order based on the outcome of the proceedings pending in the state of Karnataka.

11. [2025] 173 taxmann.com 562 (Bombay) Goa University vs. Joint Commissioner of Central Goods and Service Tax dated 15th April, 2025.

The fees collected by the University are in terms of the statutory mandate to undertake the activities as set out in the Goa University Act towards regulating the activity of colleges affiliated to the university cannot be brought under the GST net.

FACTS

The petitioner, Goa University, is a University established under the Goa University Act, 1984. The petitioner received a show cause notice demanding service tax on affiliation fee from the Deputy Director, DGGI, Goa. demanding service tax on certain incomes, such as affiliation fees collected by them for various programmes are meant for students and treated as student-related activity such as sale of prospectus, sale of old newspaper, various fees received towards sports, eligibility certificate, migration certificate, admission fee etc. from students. The petitioner challenged the same along with Circular dated 17/06/2021 and Circular dated 11/10/2024, where it was clarified that affiliation services provided by universities to their constituent colleges are not covered within the ambit of exemptions provided to educational institutions. The impugned circulars are challenged on the ground that they assume that the activity of affiliation/accreditation would amount to supply without clarifying as to how the same would be a supply of service.

HELD

The Hon’ble Bombay High Court held as under:

(i) The petitioner University is creature of statute i.e., the Goa University Act, 1984. The petitioner was established with a purpose of ensuring proper and systematic instruction, teaching, training and research. The fees such as affiliation fees, prospectus fees and migration certificate fees, sports fee etc. received by the petitioner are per se not commercial in nature. The State has a duty to provide education to the people of India. This duty is being discharged through the University.

(ii) The affiliation is undertaken by the University in terms of the requirement of the statute and in discharge of public functions, the fee so collected for affiliation fails to qualify as ‘consideration’. The fees collected by the University i.e. Affiliation fees, PG registration fees and convocation fees are not amenable to GST inasmuch as the fees collected by the University is not a consideration as contemplated in section 7 of CGST Act/GGST Act, as the fees are collected in the nature of statutory fee or regulatory fee in terms of the statutory provisions and not contractual in nature.

(iii) So far as University is concerned, the clarifications issued by the above Circular are contrary to the statutory provisions of sections 7 and 9 of the GST Legislations inasmuch as the said Circular assumes that the said activity of affiliation service provided by the University to their constituent colleges would qualify as supply. Thus, the said clarifications restrict the scope of exemption notification and makes the fee collected by the Board from the educational institution for the purpose of accreditation to such Board, liable for GST. It’s therefore contrary to the plain language of the notification which exempts services by educational institution to its students, faculty and staff and also services provided to educational institution.

(iv) The Hon’ble Court relied upon the decision of Apex Court in the case of Commissioner of Sales Tax vs. Sai Publication Fund, (2002) 4 SCC 57 holding that where the main and dominant activity of the University is education, demand of GST on sale of prospectus, sale of old newspaper, various fees towards sports, eligibility certificate, migration certificate, admission fee etc. received from students cannot be termed as business activity to demand tax.

(v) In light of the above reasoning, the Court quashed the show cause notice for the absence of jurisdiction to issue the same.

12. [2024] 169 taxmann.com 1 (Allahabad) A.V. Pharma vs. State of U.P dated 12th November, 2024.

The order passed under section 73(9) for F.Y. 2017-18 after 05-02-2020 (or as the case may be 07-02-2020) is invalid as the Notification dated 24-04-2023 with effect from 31-03-2023 (which is identical to Notification No. 9/2023-CT dated 31-03-2023) is effective from 31/03/2023 only and the period of limitation for F.Y. 2017-18 expired before 31/03/2023.

FACTS

The petitioner challenged the Order dated.05.10.2024 and the Order dated.02.12.2023 issued for F.Y. 2017-18 on the ground that as they have been passed beyond the time limit prescribed therein as calculated from the due date of filing annual returns prescribed in section 44 (1), which was extended to 05.02.2020, and the time limit of three years ended on 05.02.2023. Both the parties relied upon the Notification dated.24-04-2023, which was made effective from 31-03-2023, that extended the time limit for issuance of order under section 73(9) of the CGST/SGST Act to 31-12-2023.

HELD

The Hon’ble Court observed that the due date for filing the annual return for F.Y. 2017-18, ordinarily 31.12.2018, was extended by notification dated 03.02.2018 to 05.02.2020. The State of U.P. adopted this extension through a notification dated 05.02.2020. Consequently, the three-year limitation under section 73(10) expired on 05.02.2023, rendering any order under section 73(9) for F.Y. 2017-18 impermissible beyond this date. It was further observed that para no. 2 of the next notification dated.24-04-2023 says that the notification dated 24.04.2023 would be applicable retrospectively but only from 31.03.2023 meaning thereby that if the time limit of three years prescribed in sub-section 10 of section 73 read with sub-section 1 of section 44 expired prior to 31.03.2023 then the notification dated 24.04.2023 extending the time limit for passing of an order under sub-section 9 of section 73 would not be applicable.

Accordingly, the Hon’ble Court held that the impugned orders are beyond the time limit prescribed under section 73(10) as applicable for the financial year 2017-18 and hence are liable to be quashed.

Note: The above judgment is followed in Ambrish Chandra Arya vs. State of U.P [2025] 173 taxmann.com 232 (Allahabad) dated 25th March, 2025 & Anita Traders LKO. U.P. vs. State of U.P. [2025] 171 taxmann.com 853 (Allahabad).

13. [2025] 173 taxmann.com 296 (Jharkhand) TATA Steel Ltd vs. State of Jharkhand dated 3rd April, 2025

High Court quashes order rejecting refund claim for export of goods and insistence by the officers on proof of export proceeds realisation in case of export of goods, rejection based on not exporting goods within three months, and unwarranted declarations asked by the officer held non-compliant with legal provisions and guidelines in the circular.

FACTS

The petitioner manufactures steel and sponge iron, for which it requires coal as a raw material. Refund application was filed by the petitioner-company for the period F.Y. 2021- 2022 along with all relevant documents. However, a show-cause notice was issued to the petitioner for rejection of the refund application. Thereafter, the petitioner immediately filed the reply to the show cause notice; however, the refund application of the petitioner was rejected on the ground of non-furnishing of documents/certificates. Thereafter, the petitioner also filed an appeal, but that was also rejected. The rejection was on the following grounds:

  • Non-furnishing of the receipt of payment within 180 days of export;
  • Non-furnishing of proof of export within 90 days of the invoice;
  • Non-furnishing of a declaration of non-prosecution;
  • Non-furnishing of undertaking under proviso to section 11(2) of the Cess Act;
  • Non-furnishing of statement as per Para 43(C) of the 2019 Circular

HELD

The Hon’ble Court observed that for export of goods, only a reconciliation statement of the Shipping Bill and Export Invoices is required, which was annexed by the petitioner to its application. It was further observed that as per Para 48 of the circular of 2019, it was clarified that insistence on proof of realization of export proceeds for processing of refund claims related to export of goods has not been envisaged in the law and should not be insisted upon. It further observed as per Para 45 of the circular of 2019, it has been clarified that as long as goods have actually been exported even after a period of three months, payment of Integrated tax first and claiming refund at a subsequent date should not be insisted upon. Further Para 4.6 of the 2023 circular provides that “as long as goods are actually exported… even if it is beyond the time frames as prescribed in sub-rule (1) of Rule 96A… the said exporters would be entitled to refund of unutilized input tax credit.” The Court also observed that EGM (Export General Manifest) details are given and it is evident that export is within 90 days of invoice. As regards to the non-furnishing of a declaration of non-prosecution, the Hon’ble Court noted that no such requirement is prescribed under the Act, still the petitioner gave such declaration in response to the SCN. The Hon’ble Court pointed out that as per Para 46 of 2019 circular, asking for self-declaration with every refund claim where the exports have been made under LUT, is not warranted. The Court further observed that as per Para 42 of 2019 circular, stipulation under the proviso to section 11(2) of the Cess Act would only apply where the registered persons make zero-rated supplies on payment of Integrated tax. As regards to non-furnishing of statement as per Para 43(C) of the 2019 circular, the Court held that it only applies when there has been a reversal of credit, which is absent in the present case. The Court also observed that the petitioner had submitted CA Certificate stating that the incidence of Compensation of Cess has not been passed on to any person. In light of the above, the Hon’ble Court held that rejection order and appellate order has no legs to stand and is liable to be quashed.

Note: The decision gives very important references to Circular No. 125/44/2019-GST dated 18-11-2019 and Circular No. 197/09/2023-GST dated 17-07-2023.

14. [2025] 173 taxmann.com 418 (Allahabad)Vinayak Motors vs. State of UP dated 24-03-2025.

The service of notice electronically on portal after the suspension of the GST registration is against principles of natural justice as no physical notice was served.

FACTS

The petitioner’s registration was suspended on 03-01-2024 and was not revived and subsequently, the notice was issued on electronic portal and ex-parte order was passed.

HELD

The Hon’ble Court observed that the petitioner was not obligated to access the GST portal to receive electronic show cause notices for F.Y. 2017-18 prior to the adjudication order dated August 20, 2024. No physical notice was issued or served. Consequently, the Hon’ble Court set aside the order due to the lack of adherence to principles of natural justice, and the petitioner was directed to treat the said order as notice and submit its final reply within four weeks.

15. [2025] 173 taxmann.com 25 (Allahabad) Solvi Enterprises vs. Additional Commissioner Grade 2 dated 24-03-25.

Adverse inference against the petitioner unwarranted as both parties held valid GST registrations at the time of transaction and registration of supplier is cancelled from a date subsequent to the date on which transaction took place between petitioner and his supplier.

FACTS

The petitioner purchased the goods from a registered dealer which was generated by the seller from the GST portal. The date of transaction in question is of 6th December, 2018 and whereas the registration of the selling dealer was cancelled with effect from the GST Act, 2017 as the registration of the seller dealer was cancelled at subsequent date i.e. with effect from 29.01.2020 and order was issued under section 74 of the CGST Act disallowing the ITC.

HELD

The Hon’ble Court held that the GST authorities, while empowered to cancel registrations from the initiation date of proceedings, cancelled the seller’s registration at a later date. The Court noted that at the time of the transaction, both the purchaser and seller held valid GST registrations, and the seller’s registration was not retrospectively cancelled. The supplier’s filing of GSTR-01 and GSTR-3B, auto-populating GSTR-2A, was undisputed, yet authorities failed to verify this and incorrectly held that the petitioner was liable for proving the seller’s tax deposit, contrary to the Act. Hence, adverse inferences against the petitioner were held unwarranted.

Issue/ Service & Communication in Digital Era

Communication methodologies have evolved from hand-written/ delivered letters to typed/printed and postal communication, to the recent email communication and now venturing into an era of automated / BOT communication. The principle of “audi alteram partem” will nevertheless prevail and requires that none should be convicted/ condemned unheard. Thus, effective communication between the revenue officer and its taxpayers ensures that the parties concerned are duly heard. Many safeguards have been implemented by progressive administrations to improve the effectiveness and efficiency of communication. However, every change in status-quo brings along certain challenges on account of inherited practices. One such relevant change is the manner of delivery of statutory notices/orders through email or portal upload which has resulted in lack of awareness by the intended recipients.

Under the GST scheme, the phrase ‘Service of notice’ has generally not been used alongside a statutory time limitation. Generally, the time limitation is linked to ‘issuance’ or ‘communication’. Therefore, it is imperative that the legal connotation behind these terms is understood and applied contextually.

WHEN IS A NOTICE/ORDER ISSUED I.E. COME INTO FORCE/ EXISTENCE?

The GST law at many instances (such as section 73/74) mandates that the notices/ orders are ‘issued’ before a prescribed time limit. Once they are issued, the service of the notice is prescribed u/s 169. Therefore, before going into the ‘service of a notice/ order’ it is imperative to also understand when a notice/ order comes into force/existence. The Kerala High Court in Government Wood Works vs. State of Kerala1 relying upon settled citations of the Supreme Court stated that any order of an authority cannot be said to be passed unless it is in some way pronounced/ published or the party effected has the means of knowing it. It is not enough if the order is made, signed and kept in the file because such order may be liable for change in hands of the authority who may even modify or destroy it before it is made known based subsequent information. To make the order complete and effective, it should be issued to be beyond control of the issuing authority. This should be done before the prescribed period though actual service is beyond that period. Similar views have been emphatically expressed by the Supreme Court in case of Delhi Development Authority (DDA) vs. H.C. Khurana2, where despatch has been held as a sine-qua non to complete the act of ‘issuance’. The Court clarified that service on the recipient was not a condition precedent for satisfying the act of issuance. In the context of a digital environment under Income tax, the Delhi High Court in Suman Jeet Agarwal vs. Income-tax Officer3 held mere generation of the notice on the database does not amount to issuance unless, it leaves the database and goes outside the control of the ITBA software. The analysis in subsequent paragraphs is on the basis that the proper officer issues and puts into motion a notice / order, without any inordinate delay, within the prescribed time limits, though service need not be complete within the said time frame.

1 1987 SCC Online Ker 697 (Ker)

2  [1993] 3 SCC 196

3 [2022] 143 taxmann.com 11 (Delhi)

WHAT ARE THE MODES OF SERVICE OF NOTICE/ ORDERS ?

Because of the sheer increase in tax-payer base and technology driven administration, the scheme of service of notices/ orders u/s 169 was amplified enlisting exhaustive modes of communication. Section 169(1) empowered the proper officer to serve notices in any one of the following modes:

i. Direct Delivery – Physically tendering through a messenger, courier partner, authorised representative or any family member;

ii. Post or Courier – Sending it through registered post or speed post at his last known address;

iii. Electronic Communication by e-mail address as per the registration details;

iv. Common Portal – Making it available on common portal;

v. Publication – in the local newspaper; and

vi. Affixation – If none of the above modes is practicable, by affixing in the place of business

On plain reading, the provision empowered the officer to pick and choose any of the five alternative modes of service and continue to persist with the said mode even if the recipient was unaware of the communication. The use of the phrase ‘any one’ inclined the officer to only upload the notice/ order on the common portal and avoid any email/ postal communication. This resulted in large scale notices concluding into adverse orders in context of cancellation of registration, assessments or adjudications on an ex-parte basis. In the era of excessive information, Taxpayers were agitated on account of the contentious service through uploading of orders, they were forced to knock the doors of the Court for such procedural matters which could have otherwise been addressed if the communication was effective and targeted to ensure the taxpayer is well informed. This article analyses the nuances of the section and whether there is any play in the said provisions which could safeguard interests of taxpayers.

WHAT IS SUBJECT MATTER OF SERVICE – NOTICE/ ORDER (OR) FORM DRC-01/07 ?

Section 169 is applicable to a decision, notice or order or communication to the taxpayer. Having understood the date of issuance of the said notice/ order, it is also important to ensure that we are looking at the right document for examining its ‘date of issue’ and ‘date of service’. In the context of adjudication, the notices are issued u/s 73(1)/74(1) and concluded by virtue of issuance of an order thereof under 73(10)/74(10). Now, Rule 142(1) requires that the summary of such notice (in Form DRC-01) and corresponding summary of the order (in Form DRC-07) are to be communicated electronically. The said DRC-01 could be issued for any proceeding under section 122, 129, 130, etc and concluded in an order under the respective section. The summary of such orders is then uploaded in form DRC-07 on the common portal.

It is thus very important to differentiate the issuance of the ‘notice’ or ‘order’ under a parent section from that of uploading the ‘summary thereof’ on the common portal. Once this distinction is noticed, it would be easier to understand and apply section 169. To reiterate, the forms in DRC-01/07 are not the notice/ orders per-se but only a summary (quantification) which needs to be uploaded on the common portal for the purpose of updation of the electronic ledgers of the taxpayer. The summary of such documents by its own does not have legal consequence over proceedings and are mere consequential documents for updating the GSTN portal, and nothing more than that. Having understood this important legal distinction, and contrary to popular perception, section 169 is to be applied onto notice/ order and not to the summary thereof which is available on the common portal.

‘COMMUNICATION’ TO TAXPAYER

There is also a third terminology ‘communicated’ which is used in the context filing of appeal u/s 107/108, where the time limit is said to commence from the date of ‘communication of order’ concerned. Though this date of communication is popularly treated as the date of service of the order and the time limit is said to have started ticking, use of a different phraseology from that specified in section 169(1), (2) and (3), suggests some different understanding to be attributed to such provision. The interpretation of the phrase ‘communicated to the person’ which is the start point of limitation, arose for consideration in SS Patel Hardware v. Commissioner, State G.S.T4. where the court while examining the provision held as under:

4. [2021] 127 taxmann.com 284 (All)

“8. Keeping in mind the fact that the delay in filing the appeal may not be condoned beyond the period of one month from the expiry of period of limitation, the phrase “communicated to such person” appearing in Section 107(1) of the Act commend a construction that would imply that the order be necessarily brought to the knowledge of the person who is likely to be aggrieved. Unless such construction is offered, the right of appeal would itself be lost though a delay of more than a month would in all such cases be such as may itself not warrant such strict construction.”
Similarly, Singh Traders vs. Additional Commissioner5 regarding satisfaction of service in accordance with the provisions of Section 169, it was stated that handing over the order to the driver of the conveyance could not be considered as valid service and hence the order itself was set aside. While the SS Patel judgement did not invalidate the order itself and merely ascertained the start time of communication of the order for the filing of appeal, the Singh Traders judgement clearly invalidated the order by holding that handing over the order to the driver (who is not an authorised person) is not valid service and hence there is no order is served on the taxpayer. This eventually leads to the conclusion that service of notice can be said to be complete only when communicated to the taxpayer or his authorised person for necessary action at its end.

5 [2021] 124 taxmann.com 295 (All)

COMPREHENSIVE READING OF SECTION 169

Coming back to the primary point of service of notice u/s 169, after specifying the modes u/s 169(1), sub-section (2) and (3) provided for a deeming fiction for completion of ‘service’ for certain modes of service i.e. placed a presumption about service and consequently casting an onus on the recipient to prove the contrary (if any). This emphasises that service of a notice/ order need not only be set in motion by the proper officer but also be complete at the recipient’s end. Under the presumption in sub-clause (2)/(3), service through hand delivery is considered as complete when duly signed and received by the concerned person; postal delivery is considered as received based on normal time taken for its delivery. The section not only provided for initiation of the service of a notice/ order at the officer’s end but also provided for presumption as to its completion based on certain events. This clearly implies that service u/s 169 needs to be viewed from the perspective of both the officer (as a sender) as well as the tax payer (as a recipient). Interestingly, there was no such deeming fiction over the mode of service via ‘email’ or uploading on ‘common portal’. This issue was highlighted in Udumalpet Sarvodaya Sangham vs. Authority6, where the Hon’ble Madras High Court interpreted section 169 and held that,

6 [2025] 170 taxmann.com 655 (Madras)

“A conjoined reading of Sub-Section (1)(2) & (3) of Section 169 would amply make it clear that the State is obliged to comply with the Clauses (a) to (c) alternatively and thereafter, comply with Clauses (d) to (f). Further, even though Clause (f) has also been proceeded with the word ‘or’ indicating it to be disjunctive / an alternative mode of services, a reading of the Clause (f) would indicate that Clause (f) could be resorted to by the State, if any of the Clauses preceding it, was not practicable. Here also, Clause (f) makes it imperative that such affixure shall be in a conspicuous place and the last known business or residence of the assessee. Therefore, the object of Section 169 is for strict observance of the principles of natural justice.”

Thus, Courts applied the analogy of sub-clause (2) and (3) and interpreted that mere sending by email or uploading on common portal did not absolve the officer from proving that the notice had been effectively served to the intended recipient and there must be a strict observance of natural justice principle. In the absence of any statutory presumption on this aspect, courts have generally been liberal in approaching the issue when the taxpayer claimed lack of knowledge over the proceedings/ orders.

THREADBARE ANALYSIS OF SECTION 169

The provisions of section 169 would thus have to be examined holistically along with other procedural provisions of the Act. While this section has specified multiple modes of service, the email communication as well as uploading notices/ orders has been the core area of dispute. Among the two as well, uploading of notices/ orders on the common portal has been the more contentious matters since taxpayers have claimed complete lack of knowledge about the existence of any such proceedings resulting in ex-parte orders.

Section 146 prescribes the common portal for functions such as registration, return filing, e-way Bill, and such other functions as stated in the corresponding Rules. The Government has also vide Notification 9/2018 dt. 23-01-2018 notified www.gst.gov.in (as amended) as the common portal u/s 146 for carrying out registration, returns and other the functions prescribed in the GST Rules. Accordingly, the prevalent GST Rules at many places have prescribed uploading forms electronically through the notified common portal. But there are also instances where the rules do not specify that the forms should be ‘uploaded on the common portal’ and merely prescribes that they should be communicated ‘electronically’. In the rest of the cases, the rules neither prescribe uploading on the common portal nor furnishing it electronically and is silent on the mode of communication. A simple tabulation of the relevant forms and the mode prescribed has been prepared below:

It may be observed that taxpayer-side forms have been specifically provided to be uploaded on the common portal and hence any other mode of communication would not be legally tenable. But in many cases where the forms are to be initiated by the proper officer, the law merely states that the same may be issued electronically or does not prescribe any mode.

We are all aware of the popular dicta in Taylor vs. Taylor and host of other decisions7 that when the statue requires doing a certain thing in a certain way, the thing must be done in that way and not using other methods. Other modes of performance are impliedly and necessarily forbidden and hence if the statute requires some form to be uploaded electronically on the common portal, the form would be considered legally filed only when the said manner as prescribed is followed (‘Expressio unius est exclusion alteris’). But where neither the statute nor the notification-9/2018 prescribes the mode specifically, is the mere uploading of the order on the common portal a sufficient and valid service?

7 Taylor vs. Taylor [1876] 1 Ch.D. 426 ;

Nazir Ahmed vs. King Emperor AIR 1936 PC 253;

 Ram Phal Kundu vs. Kamal Sharma [2004] 2 SCC 759; and 

Indian Banks Association vs. Devkala Consultancy Service [2004] 

137 Taxman 69/267 ITR 179/AIR 2004 SC 2615 = [2004] 11 SCC 1, 

Gujarat UrjaVikas Nigam Ltd. vs. Essar Power Ltd. [2008] 4 SCC 755

For instance, the process of application for registration requires the taxpayer to use the ‘common portal’ for filing/ uploading the required forms. However, the notices seeking clarification, documents, etc during the registration process are to be performed ‘electronically’. Once the registration is granted, provision of rejection/suspension of any registration merely direct the officer to issue a notice to this effect but does not specify any mode of issuance/ service. Similarly, the refund process requires the applicant to use the common portal for uploading the forms, but the adjudicatory process in form of SCN/ orders in the refund process, does not specify that the officer must upload the same on the common portal. Even during the adjudicatory process of demands, the Rules prescribe that the DRC-01 (being only a summary of the quantum specified in notice and not the notice per-se), etc to be communicated electronically and the orders are not stated to be uploaded on the common portal. It is only for DRC-07 (which is also a summary demand raised in the order) which is required to be uploaded on the common portal in order to update the Electronic Liability Ledger. The law is silent on the mode of communication of the detailed notice/ order.

Now juxtaposing the provisions of section 169 r.w.s.146 and other specific provisions of registration, refund, adjudication, etc, it seems that law does not mandate uploading the adjudication notices/ orders on the common portal. Notification 9/2018 (as amended) prescribes the common portal for specific function based on the requirements under the respective rule. But where there is no prescription of uploading/ making available certain notices orders on the common portal, the said Notification is not invocable and the common portal cannot be used as a medium for performing the said function. It is only where the common portal is designated for a specific purpose in terms of a specific rule/notification would the same be considered as the designated place of uploading the notices/ orders.

Given this legal picture, it could be argued out that the taxpayer should not be expected to view the notices/ orders section of the ‘common portal’ for the notice or order. Even if they are uploaded as an attachment to the summary, the notice/ order cannot be termed as ‘served’ u/s 169 as section 146 does not prescribe the common portal for such purposes. At best the common portal can be considered as a repository of the notice/ order along with the summary thereof. While the uploaded notices/ orders can be considered as informative in nature, the revenue cannot contend that ‘making available the notice / order on common portal’ (clause (d)) is legally recognised service when the common portal has itself not been designated for this purpose. This then requires the proper officer to serve the same through other modes including that of ‘email communication’ or ‘physical modes of email/ post’ as alternatively prescribed u/s 169.

Therefore, section 169 and 146 should be interplayed with the respective parent provisions and mere summary cannot be used to decide the service of such notice/ orders. The true purport of the alternatives provided in section 169 is that proper officer would be required also refer the relevant rule/ form and the manner prescribed therein. If the manner is prescribed therein, the proper officer ought to serve the notice by the manner specified therein. Where the manner is not prescribed therein, the service would have to be in the manner which ensures that the details are brought within the knowledge of the taxpayer (principles of natural justice).

One should also be mindful of the provisions of section 160(1) and (2) which presumption valid service where the recipient takes responsive action. Thus, the above analysis could be applied only where the proceedings are ex-parte and the taxpayer can establish the bonafide of being unaware of the proceeding. But where the taxpayer has downloaded the notice and taken reciprocal action by filing reply or other actions, section 160(2) grants shelter to such proceedings unless the taxpayer in its first instance specifically argues that the service of the document itself is not valid. The taxpayer cannot blow hot and cold at the same time and would be under a legal obligation to participate in the proceeding despite the service of such notice/ order not being in conformity with the respective rule, if they have acted upon the same.

ELECTRONIC COMMUNICATION UNDER IT ACT, 2000

The next question that arises is in respect of forms where rules are silent on uploading the notices/ order on the common portal. Whether e-mail communication to the registered email address would be a valid service of such notices/ order? Section 169(2)/(3) are silent on the completion of service of the said email communication and one would have to refer to ancillary enactments.

Section 4 of the Information Technology act grants legal recognition to electronic records notwithstanding that the primary enactment requires anything to be done physically. Now section 13 of the said Act speaks about the timing of receipt of documents despatched by the originator (in our case the proper officer). Where the addressee has a designated computer resource for the purpose of receiving electronic record, the receipt is said to occur when the electronic record ‘enters’ computer resource and if the electronic record is sent to computer resource of the addressee that is not designated for this purpose, then receipt occurs at the time the addressee retrieves the record from the computer resource. Where the addressee does not have a designated computer resource along with specific timings, receipt occurs when the electronic record enters the computer resource of the addressee.

In the context of uploading, can the GSTN log-in at the common portal be considered as a ‘designated computer resource’ of the addressee? Computer resource is defined under the IT Act 2000 to mean computer, computer system, computer network, data, computer data base or software. The common portal hosted on the server is owned and managed by the GST network and not strictly a computer resource ‘of’ the taxpayer. While there is no immediate answer, even if the account created therein can be said to be designated for the use of taxpayer, the said common portal has not been designated for the purpose of adjudication, cancellation, suspension, etc (refer discussion above). Therefore, there may still be an argument to not consider the GSTN portal as a ‘designated computer resource’ of the taxpayer for purpose other than those specified in the notification/ respective rule (refer table). In which case, the communication of the notices, orders etc which are required in law to be uploaded on common portal would be governed by clause 169(d) but in all other cases they can be said to be served only when the addressee retrieves (downloads) them from the GSTN portal in terms of section 169(c) read with the IT Act, 2000.

Now with respect to notices/ orders communicated via email (such as Gmail, private servers, etc), such webservers can be designated computer resources of the taxpayer. As stated earlier, though service is initiated by ‘sending an email communication’ there is no presumption u/s 169 about the completion of service in case of email communication. Therefore, in the absence of a specific presumption about the service of documents via email, the date of receipt of email in Gmail/web-server may be considered as service. But if the email account is not logged-in from a private computer, the said recipient does not acquire knowledge about it and may be caught unaware. This particular issue was examined in the context of section 13 of the Information technology Act.

What is receipt in a computer resource was analysed by Bombay High Court in Pushpanjali Tie Up Pvt. Ltd vs. Renudevi Choudhary8 where the court analysed ‘receipt of an electronic record’ u/s 13(2) and held that although a person may be said to have received an electronic record when it enters his computer resource, it does not necessarily mean or follow that he had knowledge either of the receipt or of the contents of the same at that time viz. at the very moment of the receipt of the electronic record. Even assuming that the legislature could enact a deeming provision fixing the time when a person is deemed to have acquired knowledge of an electronic record, section 13(2) does not contain such a deeming provision. In any event section 13 of the IT Act is not relevant for deciding whether a party had knowledge of an order for the purpose of the proceedings for contempt of court or for taking action for contempt of court, whether under the Contempt of Courts Act or under Order 39 Rule 2-A of the Code of Civil Procedure. Section 13(2), determines “the time of receipt of an electronic record”. It does not determine the time of knowledge of the contents of the electronic record or even of the receipt of the electronic record. It would be difficult to have a statutory provision to determine the time when a person acquires knowledge of something. That would depend on the facts of a case. Even if there is such a deeming provision in a statute, a person cannot be held guilty of committing a breach of an order on the basis thereof although he in fact had no knowledge of the contents of the electronic message. Take for instance a case where a person establishes that although an electronic record was received in his computer resource on a particular date, he in fact did not access the same till much later. He cannot then be held guilty of having committed a breach of the order for he had no knowledge of the same. A person may not be in a position to access the electronic record much after it was received in his computer for a variety of reasons. For instance, he may have been ill, he may have lost his computer, he may not have access to the computer or there may be an area where there is no internet access. Questions of contempt stand on an entirely different footing. Thus merely because an electronic record is deemed to have been received at the time when it enters a persons computer resource, it does not necessarily follow that he had knowledge of the communication at that point of time especially in proceedings for contempt or while deciding whether the person committed wilful breach of an order of a court. The time of receipt of an electronic record may, at the highest raise a presumption of the knowledge of the receipt and/or the contents thereof but nothing more in contempt proceedings.

82014 SCC OnLineBom 1133

There is also a decision as well in the case of Rapiscan Technologies9 which was examining whether uploading of orders on the income-tax portal by the Dispute Resolution Panel (DRP) would amount to ‘receipt by the assessing officer’ for completion of the assessment at his end within the prescribed time frame. The court held that uploading of the order by DRP on a resource designated for the Income tax department is receipt and hence the time limitation for this purpose triggers from that day onwards.

9 [2025] 170 taxmann.com 753 (TELANGANA) 
Rapiscan Systems (P.) Ltd. vs. ADIT (Int.Tax)-2

FAVOURING JUDICIAL TREND

There has been a favourable judicial trend (though very summary orders) in granting relief to taxpayers where the communication was limited only to uploading on common portal. The legal citations which emerged on this subject can be clubbed into two baskets (a) decisions which analysed the section with emphasis on natural justice; (b) decisions which merely examined the deviation of portal from the law and granted relief based on taxpayer’s bonafides;

Category 1 – The Madras High Court has been particularly firm on this subject matter. In its decision10, the Court categorised the modes of service into primary and secondary. The first three clauses of physically tendering/ post or email was considered as the primary mode of service. The remaining three clauses were considered as secondary modes of service which could be resorted if the primary mode did not elicit any response from the taxpayer. The court acknowledged that the traditional modes of post were ideal for taxpayers who were yet to acclimatise to the modern digital environment. In another decision11, the Court examined that while recognising the law permits service of notice/order via email, it also stated that in reality it would be onerous for small traders to expect them to monitor the emails on a regular basis; leaving a strong possibility that the communication goes unnoticed. It re-emphasised the need for a postal communication to avoid any ambiguity on the service of documents. Ultimately, the Court relied upon the legal intent to encourage compliance of the notice rather than curtail taxpayer’s response. Basing its decision on principles of natural justice, the court held that efforts should be made to serve the notice by post and elicit a response from the taxpayer.

10 Sri Balaji Traders vs. Deputy Commercial Tax Officer 
[2025] 173 taxmann.com 15 (Madras)

11Sakthi Steel Trading vs. Assistant Commissioner (ST) [2024] 159 taxmann.com 233 (Madras)

Category 2 – The Madras high court in another decision12 recognised the complex architecture of the GSTN portal and the manual. The court observed that uploading the notices/ orders in “Additional Notices and Orders” section in contrast to the “Notices and Orders” section raises a possibility of missing the notices by taxpayers. Similar view was adopted by the Allahabad High Court13 and the Court held that the taxpayers are entitled to the benefit of doubt in cases where the orders are uploaded under the “Additional Notices and Orders” section. The Patna High Court14 observed that as per the website manual, the notices, orders are communicated to be posted on the “Notices and orders” section and the “Additional notices and orders” section does not find any mention in the manual. Moreover, since there is no deeming fiction in 169(3) in so far as the uploading the notices/orders in the portal, the taxpayer is entitled to the benefit of being unaware of the proceedings. These decisions grant relief to taxpayers without laying down any definite legal proposition on this subject.

12 [2023] 154 taxmann.com 147 (Madras) Sabari Infra (P.) Ltd. 
vs. Assistant Commissioner (ST)

13 [2025] 170 taxmann.com 482 (Allahabad)  National Gas Service 
vs. State of U.P. relying upon Ola Fleet Technologies (P.) Ltd. 
v. State of U.P. [2025] 170 taxmann.com 66 (All.)

14 [2025] 172 taxmann.com 794 (Patna) Lord Vishnu Construction (P.) Ltd.
 vs. Union of India

CONTRARY CITATIONS

In the midst of these decisions, there are certain contrary decisions of Courts15 which have specifically relied upon the plain language and stated that any of the modes of services u/s 169 could be adopted as they are not conjunctive but alternative. Accordingly, email communication has been treated as a legally valid mode of communication though the taxpayer was ultimately granted interim relief on grounds of uploading DRC-07 in the Additional Notices section. In a batch matter before the Single Member of Madras High Court in Poomika Infra Developers16, relying upon an erstwhile law decision of the division bench and distinguishing the other Single member decisions, it was held that uploading the notice/ order on the common portal is valid service u/s 169. In reaching this conclusion, the court observed that (a) section 169 is clear as it directs any mode of service and there is no reason to categorise the first three clauses and the remaining into two separate baskets; (b) reference of rule 142 prescribed under section 146 is independent of section 169 which is specific to service and despite rule 142 limiting itself only to ‘summary of notice/ order’ uploading of the notice or order is valid form of service in light of section 169; (c) section 13 of Information Technology Act, 2000 could be applied to treat the log-in credentials on the common portal as the designated computer resource and hence receipt of the notice/ order on the specific account is valid service. The said decision summarily wipes out certain arguments discussed above and contrary to other decisions that views mere uploading as not being sufficient service. This also goes against the analysis of the section and decision of Bombay High Court in Pushpanjali Tie Up Pvt (supra) which elaborates ‘receipt’ in context of IT Act, 2000. Having said all this, the Court in its conclusive part still directed the revenue to introduce a practice of sending email/ SMS communication intimating the taxpayer about the upload on the common portal with a caveat that this email would not be used for deciding service of the notice/ order. With due respect, this decision needs to be examined further and appealed to arrive at the correct legal position.

15  [2023] 148 taxmann.com 9 (Madras) New Grace Automech Products (P.) Ltd. vs.
 State Tax Officer ; 
[2024] 167 taxmann.com 228 (Calcutta)  Jayanta Ghosh vs. 
Union of India & [2024] 
167 taxmann.com 7 (Calcutta) Delta Goods (P.) Ltd. vs. Union of India; 
Koduvayur Construction vs. Asstt. Commissioner [2023] 153 taxmann.com 333 
(Ker.)

16  W.P. Nos.33562 &Ors of 2025

COMPARISON WITH ERSTWHILE LAWS

The applicability of section 169 to notices/ order varies from that specified under the erstwhile Central Excise law which contained a waterfall mechanism of service of notices/orders, etc (section 37C of Central Excise Act). Service of any document by tendering it through registered post (subsequently including speed post) was considered as the most preferred methodology. In case of failure, affixation in the factory/ warehouse or usual residence was considered as the next alternative; and as a last resort, publication on the notice board of the officer was considered as a completing the service of notice by the concerned authority. The intention of such a mechanism was to ensure that the administrating authority takes honest efforts to engage with the taxpayer and the intended recipient is conferred its due opportunity. Even in postal service, the relevant officer was mandated to retain a copy of the acknowledgement of receipt by the recipient. Naturally, a well-defined process in section 37C experienced very limited litigation on the ‘mode of service’. Previously disputes were limited and now in GST era, a relatively short timeframe of 8 years have generated far greater litigation than its erstwhile laws.

CONCLUSION

Thus, uploading of notices/ orders in many instances are not specified to be necessarily performed on the common portal. In such cases the taxpayer is rightful in its plea to expect either an email communication or a postal delivery of the relevant document. The various communications which are entirely conducted on common portal do not seem to be the legally apt approach Consequently, the persistence of the revenue in sticking only to the common portal for legal notices needs to be reviewed. Tax payers on the other hand may consider widening the scope of their tracking of notices/ order even to portal dashboard to avoid any undesired incidents in the adjudication proceedings.

The Judgement Of The Supreme Court In The Case Of Radhika Agarwal And Its Implication On Arrest Under The Goods And Service Act, 2017

1. INTRODUCTION

The laws regarding the prosecution of economic offences are evolving at a rapid pace. With the multitude of special acts governing commercial transactions growing and evolving over the years, it is but natural that even the enforcement of penal provisions would occur. The structure of taxation for indirect tax saw a marked change with the introduction of the Goods and Service Tax Act, 2017 (‘GST’) in all its various avatars. Almost a decade later, the field of direct taxation seems to be headed for a complete overhaul in the year 2026. These new laws, which have financial consequences and also impose criminality on certain transactions will interact with laws that were enacted prior in time to them and shall also try and find a place within the existing framework of criminal law jurisprudence. The subject of tracing the interplay between various acts has justifiably become a blockbuster headline for many articles and seminars. With a variety of laws being triggered by a singular transaction, the implication in the commercial world can be that of a complication. While it is true that ignorance of the law cannot be a defence against legal action, the plethora of laws that can potentially get triggered and the consequent multitude of proceedings (both civil and criminal) can weigh very heavily on the shoulders of a businessman or a professional. As if the interplay between various special laws by themselves was not complicated enough, the interplay of these special acts with traditional acts and codes has given rise to significant litigation in recent days.

The recent judgment of the Supreme Court in the case of Radhika Agarwal vs. UOI [2025] 171 taxmann.com 832 (SC) is a landmark judgment that sheds light on certain aspects of summons and arrest under the Customs Act, 1972, as well as the Goods and Service Tax Act, 2017. For the purposes of this discussion, we will explore the implications it has on proceedings under the latter.

A BRIEF INTRODUCTION TO PROSECUTION UNDER THE GST

Chapter XIX of the GST deals with offences and penalties under the central act and its counterpart in each State. The various offences under the act are contained primarily under section 132 of the GST. While Section 132(1) lists the various offences that are punishable under the act, all of them are not equal.

Section 132(4) states that “Notwithstanding anything contained in the Code of Criminal Procedure, 1973,  all offences under this Act, except the offences referred to in subsection (5), shall be non-cognizable and bailable.”

Section 132(5) states, “The offences specified in clause (a) or clause (b) or clause (c) or clause (d) of sub-section (1) and punishable under clause (i) of that sub-section shall be cognizable and non-bailable.”

For the sake of convenience, let us call the non-cognizable and bailable offences minor offences and the cognizable and non-bailable offences major offences. The major offences are as follows:-

Whoever commits, or causes to commit and retain the benefits arising out of, any of the following offences

(a) supplies any goods or services or both without the issue of any invoice, in violation of the provisions of this Act or the rules made thereunder, with the intention to evade tax;

(b) issues any invoice or bill without supply of goods or services or both in violation of the provisions of this Act, or the rules made thereunder leading to wrongful availment or utilisation of input tax credit or refund of tax;
(c) avails input tax credit using the invoice or bill referred to in clause (b) or fraudulently avails input tax credit without any invoice or bill;

(d) collects any amount as tax but fails to pay the same to the Government beyond a period of three months from the date on which such payment becomes due;

Only when they are punishable under sub-section (i) – which reads as follows –

“In cases where the amount of tax evaded or the amount of input tax credit wrongly availed or utilised or the amount of refund wrongly taken exceeds five hundred lakh rupees, with imprisonment for a term which may extend to five years and with fine”.

The term five hundred lakh refers to a sum of ₹5,00,00,000/- (Rupees five crore only). Therefore, even if the above offences are committed, and the sum involved is ₹5,00,00,000/- or less, then the offence shall be non-cognizable and bailable. It is important to note that the monetary limit in this case, therefore, is an indicator not of the threshold for prosecution but more of the severity of the consequences that follow. There are three different monetary limits prescribed in Section 132, with the thumb rule being that the lower the threshold, the lesser the severity of the sentence. However, if the accusation is of the aforementioned offences for more than a sum of Rupees Five Hundred Lakh, then the GST department officers are clothed with significant powers of arresting without a warrant, and bail is not available as a matter of right.

WHAT IS THE DIFFERENCE BETWEEN A BAILABLE AND A NON-BAILABLE OFFENCE?

A bailable offence is one in which Bail is available as a matter of right. Section 436(1) of the Code of Criminal Procedure, 1973 (‘CRPC’) and Section 478(1) of the BharatiyaNagrik Suraksha Sanhita,2023 (‘BNSS’) are parimateria in as much they mandate that if a person other than one detained or arrested for the non-bailable offence without a warrant, then the officer in charge of the police station or the Court shall release such person on bail. The word shall signify that in the case of a bailable offence, bail is available as a matter of right.

For a non-bailable offence, bail is not available as a matter of right and is at the discretion of the Court as per Section 437 of the CRPC and Section 480 of the BNSS. The term non-bailable does not signify that there is an absolute bar on the grant of bail but signifies that the grant of bail will not be a matter of course or a matter of right.

WHAT EXACTLY IS A COGNIZABLE OFFENCE?

Section 2(c) of the CRPC defines a cognizable offence. In the BNSS, the same is defined in Section 2(1)(g). The words used in the definition are ‘parimateria’ to each other and read: “cognizable offence” means an offence for which, and “cognizable case” means a case in which a police officer may, in accordance with the First Schedule or under any other law for the time being in force, arrest without warrant”.

In short, for a cognizable offence, the police officer does not require a warrant to arrest an accused.

DO GST OFFICERS HAVE THE POWER TO ARREST?

The Supreme Court, in the case of Om Prakash v. Union of India (2011) 14 SCC 1, while examining the powers of officers of the Central Excise Department to effect arrest, had held that “In our view, the definition of “non-cognizable offence” in Section 2(l) of the Code makes it clear that a non-cognizable offence is an offence for which a police officer has no authority to arrest without warrant. As we have also noticed hereinbefore, the expression “cognizable offence” in Section 2(c) of the Code means an offence for which a police officer may, in accordance with the First Schedule or under any other law for the time being in force, arrest without warrant. In other words, on a construction of the definitions of the different expressions used in the Code and also in connected enactments in respect of a non-cognizable offence, a police officer, and, in the instant case, an Excise Officer, will have no authority to make an arrest without obtaining a warrant for the said purpose. The same provision is contained in Section 41 of the Code which specifies when a police officer may arrest without order from a Magistrate or without warrant.” However, the statutory scheme under the GST is different from what the scheme under the Central Excise Act 1944 was at the time of ‘Om Prakash’.

In the case of GST, Section 69 explicitly deals with the power to arrest and vests the discretion to authorize an officer to effect arrest based on his ‘reasons to believe’ that a person has committed any offence specified in Section 132(1) a, b, c or d as read with Sub-section (1) or (2) thereof.

The power of the GST officers to arrest has been upheld by the Supreme Court in the case of Radhika Agarwal. This power had been challenged in the said Petition on the grounds of legislative competency. The position canvassed was that Article 246-A of the Constitution, while conferring legislative powers on Parliament and State Legislatures to levy and collect GST, does not explicitly authorize the violations thereof to be made criminal offences. The Court held that “The Parliament, under Article 246-A of the Constitution, has the power to make laws regarding GST and, as a necessary corollary, enact provisions against tax evasion. Article 246-A of the Constitution is a comprehensive provision and the doctrine of pith and substance applies.. .. a penalty or prosecution mechanism for the levy and collection of GST, and for checking its evasion, is a permissible exercise of legislative power. The GST Acts, in pith and substance, pertain to Article 246-A of the Constitution, and the powers to summon, arrest and prosecute are ancillary and incidental to the power to levy and collect goods and services tax.”

The Supreme Court has, therefore, upheld the power of GST officers to effect arrests as provided by the GST.

CAN ANTICIPATORY BAIL BE SOUGHT FOR OFFENCES UNDER THE GST?

The power of the Courts to grant anticipatory bail under Section 438 of the CRPC (predecessor to Section 482(1) of the BNSS) was not available in the cause of a person summoned under Section 69 of the GST Act.

In State of Gujarat vs. Choodamani Parmeshwaran Iyer, (2023) 115 GSTR 297, a two-judge Division Bench of the Supreme Court had held that “The position of law is that if any person is summoned under section 69 of the CGST Act, 2017 for the purpose of recording of his statement, the provisions of section 438 of the Criminal Procedure Code, 1973 cannot be invoked. We say so as no first information report gets registered before the power of arrest under section 69(1) of the CGST Act 2017 is invoked, and in such circumstances, the person summoned cannot invoke section 438 of the Code of Criminal Procedure for anticipatory bail. The only way a person summoned can seek protection against the pre-trial arrest is to invoke the jurisdiction of the High Court under article 226 of the Constitution of India.” The decision was then later followed in the case of Bharat Bhushan v. Director General of GST Intelligence, (2024) 129 GSTR 297 by another two-judge Division Bench of the Supreme Court.

However, Radhika Agarwal marks a departure from this line of Judgements in as much as the three-judge bench of the Supreme Court has held that the power to seek anticipatory bail shall be available to a person who is apprehensive of arrest under the GST. The Supreme Court held that

“The power to grant anticipatory bail arises when there is apprehension of arrest. This power, vested in the courts under the Code, affirms the right to life and liberty under Article 21 of the Constitution to protect persons from being arrested. Thus, in Gurbaksh Singh Sibbia (1980) 2 SCC 565, this Court had held that when a person complains of apprehension of arrest and approaches for an order of protection, such application, when based upon facts which are not vague or general allegations should be considered by the court to evaluate the threat of apprehension and its gravity or seriousness. In appropriate cases, application for anticipatory bail can be allowed, which may also be conditional. It is not essential that the application for anticipatory bail should be moved only after an FIR is filed, as long as facts are clear and there is a reasonable basis for apprehending arrest. This principle was confirmed recently by a Constitution Bench of Five Judges of this Court in Sushila Aggarwal and others vs. State (NCT of Delhi) and Another (2020) 5 SCC 1. Some decisions State of Gujarat vs. Choodamani Parmeshwaran Iyer and Another, 2023 SCC OnLine SC 1043; Bharat Bhushan v. Director General of GST Intelligence, Nagpur Zonal Unit Through Its Investigating officer, SLP (Crl.) No. 8525/2024 of this Court in the context of GST Acts which are contrary to the aforesaid ratio should not be treated as binding.”

Therefore, anticipatory bail can be applied for and granted in the case of offences under the GST, where there is a reasonable basis for apprehending arrest.

ARE THERE SAFEGUARDS OF THE POWER TO ARREST?

Though the Supreme Court has upheld the power of GST officers to arrest, it has deemed fit to elucidate and clarify certain aspects of this power. Some key takeaways are listed below:-

(a) The GST Acts are not a complete code when it comes to the provisions of search and seizure and arrest, for the provisions of the CRPC (and now the BNSS) would equally apply when they are not expressly or impliedly excluded by provisions of the GST Acts.

(b) To pass an order of arrest in case of cognizable and non-cognizable offences, the Commissioner must satisfactorily show, vide the reasons to believe recorded by him, that the person to be arrested has committed a non-bailable offence and that the pre-conditions of sub-section (5) to Section 132 of the Act are satisfied. Failure to do so would result in an illegal arrest. On the extent of judicial review available with the court viz. “reasons to believe”, in Arvind Kejriwal vs. Directorate of Enforcement, (2025) 2 SCC 248, it was held that judicial review could not amount to a merits review.

(c) The exercise to pass an order of arrest should be undertaken in right earnest and objectively, and not on mere ipse dixit without foundational reasoning and material. The arrest must proceed on the belief supported by reasons relying on material that the conditions specified in sub-section (5) of Section 132 are satisfied and not on suspicion alone. Such “material” must be admissible before a court of law. An arrest cannot be made to merely investigate whether the conditions are being met. The arrest is to be made on the formulation of the opinion by the Commissioner, which is to be duly recorded in the reasons to believe. The reasons to believe must be based on the evidence establishing —to the satisfaction of the Commissioner — that the requirements of sub-section (5) to Section 132 of the GST Act are met. In Arvind Kejriwal it was held that “reasons to believe” are to be furnished to the arrestee such that they can challenge the legality of their arrest. Exceptions are available in one-off cases where appropriate redactions of “reasons to believe”
are permissible.

(d) The power of arrest should be used with great circumspection and not casually. The power of arrest is not to be used on mere suspicion or doubt or for even investigation when the conditions of subsection (5) to Section 132 of the GST Acts are not satisfied.

(e) The reasons to believe must be explicit and refer to the material and evidence underlying such opinion. There has to be a degree of certainty to establish that the offence is committed and that such offence is non-bailable. The principle of the benefit of the doubt would equally be applicable and should not be ignored either by the Commissioner or by the Magistrate when the accused is produced before the Magistrate.

(f) The Supreme Court reiterated certain principles laid down in Arvind Kejriwal with regard to arrest by the Directorate of Enforcement and held that they shall be applicable to arrest under GST as well. These safeguards include the requirement to have “material” in the possession of the Commissioner, and on the basis of such “material”, the authorised officer must form an opinion and record in writing their “reasons to believe” that the person arrested was “guilty” of an offence punishable under the PML Act. The “grounds of arrest” are also required to be informed forthwith to the person arrested.

(g) The Court reiterated that the courts can judicially review the legality of arrest. This power of judicial review is inherent in Section 19, as the legislature has prescribed safeguards to prevent misuse. After all, arrests cannot be made arbitrarily on the whims and fancies of the authorities. This judicial review is permissible both before and after criminal proceedings or prosecution complaints are filed. Courts may employ the four-part doctrinal test as observed in the case of Arvind Kejriwal with regard to the doctrine of proportionality in their examination of the legality of arrest, as arrest often involves contestation between the fundamental right to life and liberty of individuals against the public purpose of punishing the guilty.

(h) The investigating officer is also required to look at the whole material and cannot ignore material that exonerates the arrestee. A wrong application of law or arbitrary exercise of duty by the designated officer can lead to illegality in the process. The court can exercise judicial review to strike down such a decision.

(i) The authorities must exercise due care and caution as coercion and threat to arrest would amount to a violation of fundamental rights and the law of the land. It is desirable that the Central Board of Indirect Taxes and Customs promptly formulate clear guidelines to ensure that no taxpayer is threatened with the power of arrest for recovery of tax in the garb of self-payment.  In case there is a breach of law, and the Assessees are put under threat, force or coercion, the Assessees would be entitled to move the courts and seek a refund of tax deposited by them. The department would also take appropriate action against the officers in such cases.

(j) A person summoned under Section 70 of the GST Acts is not per se an accused protected under Article 20(3) of the Constitution.

(k) It is obvious that the investigation must be allowed to proceed in accordance with law and there should not be any attempt to dictate the investigator, and at the same time, there should not be any misuse of power and authority.

(l) Relying on Instruction No. 02/2022-23 [GST – Investigation] dated 17th August, 2022, the Court held that the procedure of arrest prescribed in the circular has to be adhered to and that the Principal Commissioner/Commissioner has to record on the file, after considering the nature of the offence, the role of the person involved, the evidence available and that he has reason to believe that the person has committed an offence as mentioned in Section 132 of the GST Act. The provisions of the Code, read with Section 69(3) of the GST Acts, relating to arrest and procedure thereof, must be adhered to.

(m) The arrest memo should indicate the relevant section(s) of the GST Act and other laws. In addition, the grounds of arrest must be explained to the arrested person and noted in the arrest memo as per Circular No. 128/47/2019-GST dated 23.12.2019 and the format prescribed by it.

(n) Instruction No. 01/2025-GST dated 13.01.2025 now mandates that the grounds of arrest must be explained to the arrested person and also be furnished to him in writing as an Annexure to the arrest memo.

(o) Instruction 02/2022-23 GST (Investigation) dated 17.08.2022 further lays down that a person nominated or authorised by the arrested person should be informed immediately, and this fact must be recorded in the arrest memo. The date and time of the arrest should also be mentioned in the arrest memo. Lastly, a copy of the arrest memo should be given to the person arrested under proper acknowledgement. The circular also makes other directions concerning medical examination, the duty to take reasonable care of the health and safety of the arrested person, and the procedure of arresting a woman, etc. It also lays down the post-arrest formalities which have to be complied with. It further states that efforts should be made to file a prosecution complaint under Section 132 of the GST Acts at the earliest and preferably within 60 days of arrest, where no bail is granted.

(p) The arresting officer shall follow the guidelines laid down in D.K. Basu vs. State of West Bengal. (1997) 1 SCC 416.

TO CONCLUDE

The Judgement of the Supreme Court in the case of Radhika Agarwal is a giant leap forward in the realm of GST prosecutions. While it does not divest the GST officers of their powers to effectively investigate and prosecute offences under the GST, it also clarifies and reiterates the important safeguards to be kept in place to ensure that these provisions are not abused.

However, in a separate and concurring Judgement Justice Bela Trivedi, while agreeing with the Judgement of Chief Justice Sanjeev Khanna and Justice M.M. Sunderesh, expressed that she thought it expedient to pen down her views on the jurisdictional powers of judicial review under Article 32 and Article 226 of the Constitution of India when the arrest of a person is challenged.

She held that “When the legality of such an arrest made under the Special Acts like PMLA, UAPA, Foreign Exchange, Customs Act, GST Acts, etc. is challenged, the Court should be extremely loath in exercising its power of judicial review. In such cases, the exercise of the power should be confined only to see whether the statutory and constitutional safeguards are properly complied with or not, namely to ascertain whether the officer was an authorized officer under the Act, whether the reason to believe that the person was guilty of the offence under the Act, was based on the “material” in possession of the authorized officer or not, and whether the arrestee was informed about the grounds of arrest as soon as may be after the arrest was made. Sufficiency or adequacy of material on the basis of which the belief is formed by the officer, or the correctness of the facts on the basis of which such belief is formed to arrest the person, could not be a matter of judicial review.” She further held that “Sufficiency or adequacy of the material on the basis of which such belief is formed by the authorized officer, would not be a matter of scrutiny by the Courts at such a nascent stage of inquiry or investigation.”

Reiterating the principle that was invoked in the case of Vijay Madanlal Choudhary and Others vs. Union of India and Others 2022 SCC OnLine SC 929 while weighingthe constitutional validity of certain provisions of the Prevention of Money Laundering Act, 2005 (‘PMLA’) that special Acts are enacted for special purposes and must be interpreted accordingly, it was held that:-

“Any liberal approach in construing the stringent provisions of the Special Acts may frustrate the very purpose and objective of the Acts. It hardly needs to be stated that the offences under the PMLA or the Customs Act or FERA are offences of a very serious nature affecting the financial systems and, in turn, the sovereignty and integrity of the nation. The provisions contained in the said Acts therefore must be construed in a manner which would enhance the objectives of the Acts and not frustrate the same. Frequent or casual interference of the courts in the functioning of the authorized officers who have been specially conferred with the powers to combat serious crimes may embolden the unscrupulous elements to commit such crimes and may not do justice to the victims, who in such cases would be the society at large and the nation itself. With the advancement in Technology, the very nature of crimes has become more and more intricate and complicated. Hence, minor procedural lapses on the part of authorized officers may not be seen with a magnifying glass by the courts in the exercise of the powers of judicial review, which may ultimately end up granting undue advantage or benefit to the person accused of very serious offences under the special Acts. Such offences are against the society and against the nation at large and cannot be compared with the ordinary offences committed against an individual, nor can the accused in such cases be compared with the accused of ordinary crimes. To sum up, the powers of judicial review may not be exercised unless there is manifest arbitrariness or gross violation or non-compliance of the statutory safeguards provided under the special Acts required to be followed by the authorized officers when an arrest is made of a person prima facie guilty of or having committed offence under the special Act.”

The last word on this subject may not yet have been spoken. The application of the law laid down in this judgement, as always, shall depend upon the facts and circumstances of each case. However, with this Judgement, an accused under the GST who is apprehensive of arrest is no longer without safeguards.

Recent Developments in GST

A. NOTIFICATIONS

i) Notification No.10/2025-Central Tax dated 13th March, 2025

Above notification seeks to amend Notification  No. 2/2017-Central Tax dated 19th June, 2017  which is regarding revision of the Territorial  Jurisdiction of Principal Commissioner/Commissioner of Central Tax, etc.

B. CIRCULARS

(i) Clarification on Rate of tax and Classification of various items under GST – Circular no.247/04/2025-GST dated 14th February, 2025.

By above circular, the clarifications are given about GST Rates and Classification for various products including SUVs, Popcorn, Raisins, Pepper, and AAC Blocks based on the recommendations of the GST Council in its 55th meeting.

C. ADVISORY

i) Vide GSTN Advisory dated 12th February, 2025, information is given regarding guidelines on GST registration under Rule 8 of the CGST Rules, 2017.

ii) Vide GSTN Advisory dated 15th February, 2025, information about introduction of Form ENR-03, allowing unregistered dealers to generate E-Way Bills using unique Enrolment ID, effective 11th February, 2025, is given.

D. ADVANCE RULINGS

Lease of land vis-à-vis Exemption Anmol Industries Ltd. (AAR Order No. 03/WBAAAR/2024 Dated: 30th August, 2024 DT. 26th November, 2024 (WB AAAR)

Earlier there was AR order no.24/WBAAR/2023-24 dated 20th December, 2023 passed by WBAAR, holding that long-term lease transaction effected by Shyama Prasad Mukherjee Port, Kolkata (SMPK) is not exempted from GST.

The ld. WBAAAR set aside said order and remanded matter back to AAR vide appeal order dated 18th April, 2024. Thereafter, fresh AR passed by AAR.

This appeal was against fresh AR No. 06/WBAAR/2024-25 dated 29th July, 2024-2024-VIL-143-AAR. By the said order, the ld. WBAAR ruled that Services by way of grant of long-term lease of land by SMPK to the appellant for the purpose of “setting up commercial office complex’ is not to be covered under entry 41 of Notification No.12/2017 Central Tax (Rate) dated 28th June, 2017 and, therefore, cannot be treated as an exempt supply.

The facts are that the appellant entered into a leasing agreement with SMPK to take on lease a plot of land at Taratala Road for thirty (30) years for the purposes of setting up a commercial office complex. The appellant was to pay upfront lease premium along with GST @ 18% on consideration of `30,90,11,000/-. The question before AAAR was:

“Whether the upfront premium payable by the appellant towards the services of by way of granting of long-term lease of thirty years, or more of industrial plots or plots for development of infrastructure for financial business by SMPK is exempted under entry 41 of Notification No. 12/2017-CGST (Rate) dated 28th June, 2017?”

Based on use for infrastructure for financial business, the crux of the contention of the appellant was that the appellant being an industrial unit has fulfilled all the conditions as specified in entry number 41 of Notification No. 12/2017- Central Tax (Rate) dated 28th June, 2017 from the end of the recipient and hence SMPK should take exemption and should not charge any GST.

The conditions of aforesaid entry 41 are reproduced as under:

“I. The lease period should be of thirty years or more;

II. The property leased should be industrial plots or plots for development of infrastructure for financial business;

III. Service provider must be a State Government Industrial Development Corporations or Undertakings or by any other entity having 20 per cent. or more ownership of Central Government, State Government, Union territory (either directly or through an entity wholly controlled by the Central Government, State Government, Union territory);

IV. Service recipient must be an Industrial Unit.”

The ld. AAAR held that AAR has not discussed the condition mentioned in the first proviso in entry 41 i.e. whether the lease plot is being used for industrial or financial activity in an industrial or financial business area, which is substantial condition for grant of exemption.

The ld. AAAR examined the said issue in detail and found that the appellant is going to set up Commercial Office by setting up such commercial office complex and all the corporate activities including accounting and financial activities will be undertaken there and that such office will be planned to maintain and monitor all the financial records and transactions of the appellant company. The ld. AAAR found that the appellant is contemplating use of plot for financial business based on use of plot for such financial activity. Though finding on above aspect was not there in AR, the ld. AAAR held that under power u/s.101(1), the AAAR can modify AR order and accordingly considered itself as competent to go into above aspect of use for financial business.

In this respect, the ld. AAAR referred to Notice Inviting Tender, NIT No. SMP/KDS/LND/03-2022 dated 15th March, 2022, in which in para 8.7 the definition of setting up of a Commercial office complex is given as under:

“Setting up of a commercial office complex in a particular plot may be allowed where the listed purposes in the tender include Assembly, Business and Mercantile Buildings and the said land shall be used by the original lessee for own Corporate use and excess vacant space of the said office complex to be let out on lease to other corporate entities who will use the complex for setting up of Business Centre, Business Chambers, Conference Rooms, Office Infrastructure, Cafeteria, Restaurant, Gymnasium, Guest House, hotel accommodation, recreation facilities, pharmacies, diagnostic clinics, retail outlets etc. In other words, the original lessee will be a business integrator where various other stake holders /investors /retailers /service providers will operate under the business integrator (original lessee) as sub-lessees.”

As per clause 8.8 in NIT, it was also found that the plot is not allowable for Industrial building defined as “Any building or structure or part thereof used principally for fabrication, assembly and or processing of goods and materials of different kinds. Such building shall include laboratories, power plants, smoke houses, refineries, gas plants, mills, dairies, factories and workshops”.

Based on above facts, the ld. AAAR observed that when Industrial building itself is not allowed, no stretch of imagination can conclude that industrial activity is allowed under the instant tender. Accordingly, the ld. AAAR held that setting up of commercial office complex has a specific purpose and the same cannot be equated to industrial activity.

Regarding use for “financial activity”, the ld. AAAR observed that “Financial activity” is not defined in the GST Laws and hence meaning to be seen as per common business parlance. The ld. AAAR held that mere maintenance and monitoring of all the required financial records and transactions of a company does not mean financial activity. The ld. AAAR held that every business aims to achieve a profit which occurs because of increase in income and decrease in expenses and for this purpose obviously every business entity undertakes activities which have financial implications. The ld. AAAR held that it is a normal activity for a business and cannot be considered as financial activity implied in NIT. Elaborating this aspect, the ld. AAAR referred to meaning of Financial Service in IBC which indicates financial activity as services like acceptation of deposits and other such independent financial activities. SAC Code 9971 specifying financial services also referred to gather meaning of ‘financial activity’.

Noting above, the ld. AAAR came to the conclusion that the appellant is not providing any of the above Finance Services and hence cannot be considered as carrying out financial activity in a financial business area.

In respect of SMPK being Government Undertaking the ld. AAAR held that though SMPK is audited by the office of the Comptroller and Auditor General of India, it cannot be conclusively regarded as an entity having 20% or more ownership of Central Government.

Accordingly, the ld. AAAR confirmed AR of the AAR and rejected the appeal.

GST on Canteen Facility for Contractual Workers Troikaa Pharmaceuticals Ltd. (AAR (Appeal) Order No. GUJ/GAAAR/APPEAL/2025/07 (in Appl. No. Advance Ruling/SGST & CGST/2022/AR/09) dt.28th February, 2025)(Guj)

The present appeal was filed against the Advance Ruling No. GUJ/GAAAR/R/2022/38 dated 10th August, 2022 – 2022-VIL-231-AAR.

The facts are as under:

♦ “the appellant is engaged in the manufacture, sale & distribution of pharma products and is registered with the department;

♦ the appellant has appointed a CSP [Canteen Service Provider];

♦ the appellant provides subsidized canteen facilities to its employees & contractual workers;

♦ the appellant recovers 50% of the amount from the employees;

♦ that as far as security service contract workers is concerned, the canteen service provider raises bill for only 50% of the amount as the rest of the amount is being directly paid by the individual workers to the service provider.”

Based on above facts, the appellant had sought Advance Ruling on the following questions:

  1. “ Whether GST shall be applicable on the amount recovered by the company,Troikaa Pharmaceuticals Limited, from employees or contractual workers,when provision of third-party canteen service is obligatory under section 46 of the Factories Act, 1948?
  2.  Whether input tax credit of GST paid on food bill of the Canteen Service Provider shall be available, since providing this canteen facility is mandatory as per the Section 46 of the Factories Act, 1948?”

The ld. AAR gave following ruling:

  1. “ GST, at the hands of M/s Troikaa, is not leviable on the amount representing the employees portion of canteen charges, which is collected by M/s Troikaa and paid to the Canteen service provider.
  2.  GST, at the hands of M/s Troikaa, is leviable on the amount representing the contractual worker portion of canteen charges, which is collected by M/s Troikaa and paid to the Canteen service provider.
  3.  ITC on GST paid on canteen facility is admissible to M/s Troikaa under Section 17(5)(b) of CGST Act on the food supplied to employees of the
    company subject to the condition that burden of GST have not been passed on to the employees of the company.
  4.  ITC on GST paid on canteen facility is not admissible to M/s Troikaa under Section 17(5)(b) of CGST Act on the food supplied to contractual worker supplied by labour contractor.”

This appeal was filed in respect of denial of ITC on canteen services provided by the appellant to contractual workers and levy of GST on food charges recovered from contractual workers.

To decide the issue, the ld. AAAR referred to provision of Section 17(5) about blocking of ITC and also Circular No.172/04/2022-GST-dated 6th July, 2022 in which clarifications are given about various issues of section 17(5) of the CGST Act.

Regarding question about levy of GST on receipts for Contractual Workers, the ld. AAAR referred to provisions of Factories Act, 1948 as well as sections 20 and 21 of CTRA,1970.

The appellant was canvassing that statutorily it is the contractor who is required to provide the amenity to the contractual workers in terms of section 16 and the onus shifts on the principal employer i.e. the appellant in case the contractor is not providing the same. The ld. AAAR concurred with above situation that though statutorily it is the contractor on whom the CLRA Act has entrusted the task of providing the amenity and the responsibility shifts on the principal employer i.e. appellant in case the contractor is not providing the same. However, the ld. AAAR observed that section of CLRA provides also that all expenses incurred by the principal employer in providing such amenity may be recovered from the contractor either by deduction from any amount payable under any contract or as a debt payable by the contractor.

From documents submitted the ld. AAAR found that the contractor has been paid the gross amount which includes salary, allowances such as canteen facility, provident fund, etc. The ld. AAAR also did not found averment by the appellant that the contractor has failed to fulfil his statutory obligation so as to shift primary requirement for providing facility on appellant.

The ld. AAAR also noted terms in agreement with Labour Contractor which explicitly states that no relationship of employer-employee is created between the appellant and the workers engaged by the contractor. The ld. AAAR, therefore, held that the clarification at serial no.5, vide circular no. 172/4/2022-GST dated 6th July, 2022 relied upon by the appellant to aver that no GST amount is leviable on the amount recovered from contractual workers for canteen services is incorrect since the clarification states that GST will not apply when perquisites are provided by the employer to its employees and not in other cases. The ld. AAAR also held that clarification at serial no. 3 of the said circular dated 6th July, 2022, regarding availment of ITC, would also not be applicable since it is available only in respect of the goods supplied to the employees of the appellant in terms of section 46 of the Factories Act, 1948, which mandates provision of canteen facilities to the employees.

In view of the above, the appeal was rejected, confirming the AR given by AAR.

Classification – Treated Water

Palsana Enviro Protection Ltd. (AAR (Appeal) Order No. GUJ/GAAAR/APPEAL/2025/08 (in Appl. No. Advance Ruling/ SGST & CGST/2023/AR/04) dt.28th February, 2025)(Guj)

The present appeal was against the Advance Ruling No. GUJ/GAAR/R/2022/47 dated 30th December, 2022 – 2023-VIL-09-AAR.

The facts are that the appellant, who has been promoted by a cluster of textile processing industries, has set up a CETP [Common Effluent Treatment Plant]. In the said CETP, the appellant recycles & thereafter supplies treated water to its member units for use in their activities. This treated water can be used in non-potable activity. Though the CETP treated water is made free from various impurities, however, even after carrying out the said physical and biological processes the said water is not pure water& cannot be termed as purified water.

The further fact is that CETP treated water is supplied to industries through pipelines. The appellant further claimed that their activity falls within the ambit of Sr. No. 99 of notification No. 2/2017-CT (R), as amended vide notification No. 7/2022-CT (Rate) dtd 13th July, 2022, as the water obtained from CETP is not ‘purified water’. To substantiate this claim, they have also relied on circulars No. 52/26/2018 dated 9th August, 2018 & 179/11/2022-GST dated 3rd August, 2022.

With above background appellant posed following questions before the ld. AAR.

  1. “ Whether ‘Treated Water’ obtained from CETP (classifiable under Chapter 2201) will be eligible for exemption from GST by virtue of Sl. No. 99 of the Exemption Notification No. 02/2017- Integrated Tax (Rate), dated 28-6-2017 (as amended) as ‘Water (other than aerated, mineral, purified, distilled, medical, ionic, battery, demineralized and water sold in sealed container)’? or
  2.  Whether ‘Treated Water’ obtained from CETP (classifiable under Chapter 2201) is taxable at 18 per cent b virtue of Sl. No. 24 of Schedule – III of notification No. 01/2017- Integrated Tax (Rate), dated 28-6-2017 (as amended) as ‘Waters, including natural or artificial mineral waters, and aerated waters, not containing added sugar or other sweetening matter nor flavoured (other than Drinking water packed in 20 liters bottles).”

The ld. AAR ruled as under:

  1. “ ‘Treated Water’ obtained from CETP (classifiable under Chapter 2201) is not eligible for exemption from payment of Tax by virtue of Sl. No. 99 of the exemption notification No. 02/2017-CT (Rate) dated 28th June, 2017 (as amended) and Sl. No. 99 of the exemption notification No. 02/2017- Integrated Tax (Rate), dated 28th June, 2017 (as amended).
  2.  ‘Treated Water’ obtained from CETP (classifiable under Chapter 2201) is taxable at 18% by virtue of Sl. No.24 of schedule – III of notification No.01/2017- CT (Rate) (as amended) and Sl. No. 24 of schedule – III of notification No. 01/2017-Integrated Tax (Rate), dated 28th June, 2017 (as amended).”

In essence, the AAR held that CETP water as ‘de-mineralized water’, excluded from exemption.

The appeal was against the above ruling.

In appeal, the appellant has reiterated its stand.

The ld. AAAR referred to relevant entries and averment. The appellant has produced laboratory certificate in course of appeal.

Based on sample water of appellant, in certificate it was stated that the water does not meet parameters of demineralized water.

The ld. AAAR declined to accept the said certificate produced by the appellant because, [a] the same was produced at an appellate stage; [b] the certificate nowhere states that the laboratory is an accredited laboratory and [c] there is no mention about the way the sample was drawn.

The appellant had relied upon certain rulings.

The ld. AAAR did not agree with rulings cited before it on ground that rulings by the Authority for Advance Ruling would be binding only on the applicant who sought it, the concerned officer or the jurisdictional officer in respect of the applicant. The ld. AAAR further observed that the Tamilnadu Authority for Advance Ruling has held that treated water obtained from CETP is de-mineralized water and will
therefore not be eligible for the benefit of the notification Nos. No. 2/2017-CT(R) dated 28th June, 2017 as amended.

In view of above findings, the appeal was rejected confirming the AR passed by GAAR.

Supply of Transportation Service vis-à-vis School Students

Batcha Noorjahan (AAR Order No. 06/ARA/2025 dt.13th February, 2025)(TN)

The applicant is engaged in the business of plying school buses and providing transportation services to the school students in commuting to their school and back home.

Applicant put up following questions to AAR.

  1. “ Whether the services provided by the applicant to the school students by way of transportation of students and staff, shall be considered as the services provided to the school (Educational Institute).
  2.  Whether the services provided by the applicant as mentioned above, shall be considered as exempted from GST as per the Serial No. 66 of Notification No. 12/2017 – Central Tax (Rate) dated 28th June, 2017 or any other applicable provision of the Act.”

The applicant has submitted following aspects of the transaction:

“i) The fees for the transportation of school students are being collected from the students directly as per the agreement with the schools.

ii) There could be a view that since the fees are directly collected from the students, the service recipient is not the school or the Educational Institution.”

As per the provisions of the Act, the services provided to the Educational Institution by way of transportation of students and staff is exempted from GST (Notification No.12/2017). It was further submitted that the applicant is providing services by way of transportation of students and staff though the bus fee is received from the students directly. It was interpretated by applicant that the schools are the service recipients though the consideration is not directly paid by them.

The ld. AAR referred to facts like the applicant has entered into a lease agreement with Alphabet International School vide agreement dated 30.09.2022 for a period of 5 years for the purpose of transporting students and staff of the school only in connection with school activity as provided under clause (8) of Rule 2 of the Tamil Nadu Motor Vehicles Regulations and Control of school buses special rules, 2012.

It was seen from agreement that there was no mention of the consideration part payable by the school to the applicant for providing the vehicle and the services related thereto. There was also no mention in the lease agreement as to how the transportation fees are to be collected, whether by the applicant or by the school.

From the copies of the receipts furnished by the applicant, it was seen that the applicant has directly raised receipt on the student concerned, towards ‘Student Transport Fees’.

The ld. AAR also observed that the applicant is not receiving any payment from the school administration and therefore, no services are rendered to the school by the applicant. The ld. AAR held that the services provided by the applicant to the school students by way of transportation and accordingly, the first question is answered in negative.

Regarding second question the ld. AAR held that the school has outsourced the transport serviceto the applicant and the applicant is directly in receipt of the consideration from the students and accordingly, the service rendered by the applicant to the students is to be considered as ‘Transport of passenger by any motor vehicle’, meriting classification under SAC 9964, attracting GST at 5% without ITC as per Sl.No.8(vi) of Notification No. 11/2017, dated 28th June, 2017, as amended vide Notification No. 31/2017-Central Tax (Rate) dated 13th October, 2017.

Since the transportation services are not suppliedto Educational Institutions as provided under Sl. No.66 of Notification No. 12/2017 – Central Tax (Rate) dated 28th June, 2017, it is not applicable to the applicant. The ld. AAR decided the AR accordingly.

Composite Supply vis-à-vis Mixed Supply

Doms Industries Pvt. Ltd. (AAR (App) Order No. GUJ/GAAAR/APPEAL/ 2025/05 (In Appl. No. Advance Ruling/SGST&CGST/2023/AR/03) dt. 22nd January, 2025) (Guj)

This appeal was filed against the Advance Ruling No. GUJ/GAAR/R/2022/52 dt.30.12.2022-2023-VIL-03-AAR.

The appellant supplies the goods in a combination with other products viz.

[a] DOMS A1 pencil. This consist of 10 pencils along with a sharpener & eraser.

[b] DOMS Smart Kit. This is a gift pack which consists of a colouring book, two pack of pencils,
one pack of colour pencil, one pack of oil pastels, one pack of plastic crayons, one pack of wax crayons, one eraser, one scale and one sharpener.

[c] DOMS my first pencil kit. It consists of a pencil, eraser, scale and a sharpener.

The applicant held view that he satisfies the four conditions to term the aforesaid supply as ‘composite supply’.

With above background, ruling was sought on following questions:

“(i) Whether the supply of pencils sharpener along with pencils being principal supply will be considered as the composite supply or mixed supply?

(ii) What will be the HSN code to be used by us in the above case.

(iii) Whether supply of sharpener along with the kit having a nominal value will have an impact on rate of tax.

If yes, what will be the rate of tax & HSN code to be used by use.”

The ruling of ld. GAAR dated 18th October, 2021 held as under:

“(i) the supply of pencils sharpener along with pencils is covered under the category of ‘mixed supply’;

(ii) as discussed in para 21.1 of the impugned ruling.

(iii) yes, the supply of sharpener along with the kit having a nominal value will have an impact on rate of tax. As discussed in para 21.2 and 21.3 of the impugned ruling.”

The appeal was filed against the above ruling.

Appellant made various submission as well as cited case laws.

In appeal, the ld. AAAR observed that the appellant is aggrieved only in respect of their product ‘DOMS A1 pencil’ which consists of 10 pcs of pencil, one eraser and one sharpener and accordingly AAAR restricted scope of appeal to the ruling on above product only.

The ld. AAAR referred to Guidance in Service Tax Education Guide issued by CBIC.

The ld. AAAR also referred to definition of term ‘composite supply’ and ‘mixed supply’ given in Sections 2(30) and 2(74) of CGST Act respectively.

The ld. AAAR concluded its finding in following terms:

“We find that the CGST Act, defines a composite /mixed supply. Additionally, CGST Act, 2017, thereafter, specifies the tax liability in such case wherein a supply falls within the ambit of either a composite /mixed supply. We have already held that the product ‘DOMS A1 pencil’, is a mixed supply, the product not being naturally bundled, not having a principal supply and not supplied in conjunction with each other in the ordinary course of business. Now, for the sake of argument, even if we were to examine the claim of the appellant, we find that the product of the applicant, in question, would not fall either within Rule 3(a) or 3(b) of the GIR, leaving us with the only alternative of resorting to Rule 3(c). The question then which would arise is whether Rule 3(c) of the GRI or Section 8(b), of the CGST Act, 2017, would prevail. It is a trite law that when the section is unambiguous, the averment of the appellant to take the assistance GRI for deciding the nature of supply, classification and rate of tax, is not legally tenable. We therefore, reject this submission of the appellant.”

Accordingly, the ld. AAAR rejected the appeal and confirmed AR given by AAR.

Goods And Services Tax

HIGH COURT

1. [2025] 172 Taxmann.com 66 (Madras) Madhesh @ Madesan Vs. State Tax Officer Dated 21st December, 2024

Once the goods are detained under section 129, detention order passed beyond the period of seven days from the date of show cause notice is liable to be set aside and detention of goods based on such time-barred order is illegal.

FACTS

In this case, the goods were detained on 29th October, 2024 and notice under section 129(3) of the Act, 2017 in Form GST MOV-07 was also issued on 29th October, 2024. However, no order of detention made in Form GST MOV-09 till date of filing writ, thereby violating the time-line stipulated under section 129(3) of the Act. The short question was whether the proceedings under section 129(3) can be sustained in the absence of complying with the time-line mandated under section 129(3).

HELD

The Hon’ble Court noted that under section 129(3) of the Act, the order ought to have been passed within a period of seven days from the date of service of such notice and hence held that the impugned proceedings are beyond the timelines stipulated under section 129(3) of the Act. Consequently, the impugned proceedings are set aside and the vehicles / goods in question were directed to be released forthwith.

2. [2025] 172 taxmann.com 100 (Allahabad) Kei Industries Ltd vs. State of U.P dated 4th February, 2025

Where goods not covered under the requirements of an E-way bill were transported, they could not be seized under section 129 for not being accompanied with an E-way bill.

FACTS

The petitioner was aggrieved by an order directing a seizure of the vehicle and the goods on the ground that the E-way Bill was not present with the goods. The department admitted in the Court that during the period under consideration, the goods that were being transported by the petitioner were not covered by the requirement of the E-way bill.

HELD

Based on the admission of the department that during the period under consideration, goods which were being transported by assessee, were not covered by the requirement of the E-way bill and relying on the decision in the case of Godrej & Boyce Manufacturing Co. Ltd. vs. State of U.P. — [2018] 97 taxmann.com 552 (Allahabad), the Hon’ble Court held that the impugned order was bad and is therefore, liable to be set aside.

3. [2025] 172 taxmann.com 133 (Gujarat) Patanjali Foods Ltd. vs. Union of India dated 12th February, 2025

Notification No. 9/2022, effective from 18th July, 2022, has a prospective effect and did not apply to refund claims of prior period, even if the claim of refund is made after 18th July, 2022. Further, once the refund application filed by the assessee is adjudicated and order is passed sanctioning the same, it is not open for the department to recover the said refund by issuing another SCN and passing different order and not by challenging the earlier order which has become final.

FACTS

The petitioner is inter-alia, engaged in the manufacture and sale of edible oil. According to the petitioner, the rate of tax applicable to input supplies of the petitioner exceeded the rate of tax on output supplies. Therefore, the petitioner qualified for a refund under the inverted duty structure scheme as per section 54(3) of the Central / Gujarat Goods and Services Tax Act, 2017. Notification No.9/2022-Central Tax dated 13th July, 2022, was issued by the Central Government, notifying certain goods, including edible oil, as ineligible for a refund under the inverted duty structure. The said Notification was made effective from 18th July, 2022. The petitioner submitted a refund application dated 5th December, 2023 for the period from February 2021 to March 2021 under section 54(3) of the GST Act.

The petitioner received a show cause notice proposing to reject the refund application on the ground that there was an existing demand against the petitioner on the GST portal. The petitioner replied to the said show cause notice, pointing out that the demands had been withdrawn pursuant to the direction of the NCLT. Thereafter, the respondent accepted the petitioner’s explanation and granted the refund after passing a sanction order.

However, subsequently, the respondent issued a notice under section 73 of the Act in Form GST-DRC-01, claiming that the earlier refund was erroneously granted in terms of application of the aforesaid notification read with Circular No.181/13/2022-GST dated 10th November, 2022 wherein it was clarified that said restriction shall apply in respect of all refund applications filed on or after 18th July, 2022.

HELD

The Hon’ble Court relied upon the decision in the case of Ascent MeditechLtd. vs. Union of India, wherein the Court struck down para 2(1) of the same Circular dated 10th November, 2022 on the ground that an artificial class of assessees cannot be created on the basis of date of filing of refund application. By that exact logic, the Hon’ble Court held that Para 2(2) of the impugned Circular dated 10th November, 2022 insofar as it provides that the restriction contained in notification no. 13th July, 2022 will apply to all the refund applications filed after 13th July, 2022, even though they are pertaining to a period prior to the date of notification, is wholly arbitrary, discriminatory and ultra-vires Article 14 as well as section 54 of the CGST Act. The Court held that as the notification is prospective in nature, the refund pertaining to period prior to 13th July, 2022 cannot be affected by such notification.

The High Court also noted that against the petitioner’s refund application dated 5th December, 2023, there has been an adjudication by the order dated 12th January, 2024, by which the petitioner’s refund application was accepted and the refund was granted. No appeal under section 107 or revision under section 108 of the CGST Act, 2017 was preferred by the department, challenging the adjudication of the petitioner’s refund application and the consequent order sanctioning the refund. Therefore, the Hon’ble Court, opined that the grant of refund to the petitioner by order dated 12th January, 2024 had become final and no show cause notice could be issued by the respondents to take away the benefits of a quasi-judicial order in the petitioner’s favour. Thus, the subsequent Order-in-Original dated 10th September, 2024, by which the show cause notice dated 2ndMay, 2024 was adjudicated, was held to be illegal and unsustainable and was quashed and set aside.

4. [2025] 172 taxmann.com 105 (Jharkhand) Steel Authority of India Ltd vs. State of Jharkhand dated 30th January, 2025.

Inadmissible ITC of VAT regime cannot be disallowed in the GST regime which is carried forward through TRAN-1 and must be adjudicated under the pre-GST law.

FACTS

Petitioner, a Public Sector Undertaking is engaged in the manufacture of various steel products. Under the VAT regime, as on 30th June, 2017, Petitioner Company had un-availed input tax credit which was transitioned by it under the GST regime in terms of section 140(1) of JGST Act. However, the petitioner received a show cause notice on the following grounds, namely;

Petitioner availed input tax credit on the purchase of consumables which it was not entitled to avail in terms of section 18(8)(viii) of JVAT Act and accordingly, the transition of said credit under the GST Act was impermissible.

(ii) Petitioner availed input tax credit on capital goods which was also not available to them in terms of provisions of section 18(5) of JVAT Act and thus, transitioning of the same under the GST Act was illegal.

Petitioner filed a detailed reply, however order was passed denying the transitional credit in GST regime on the ground that transitioning of inadmissible input tax credit under the GST Act was illegal. Against the aforesaid order, the petitioner preferred an appeal before the Appellate Authority, but the Appellate Authority, rejected the appeal and confirmed the adjudication order.

HELD

Eligibility of input tax credit under erstwhile VAT Act to be adjudicated under provisions of repealed Act. Proceedings for alleged inadmissible credit under the GST Act is improper and without jurisdiction. Impugned adjudication order and appellate order quashed. Amount recovered to be restored with interest, however, Respondent authorities were allowed to initiate proceedings under repealed VAT Act if so advised.

5. [2025] 172 taxmann.com 129 (Madras) KesarJewellers vs. Additional Director General dated 7th February, 2025

There must be tangible material on record suggesting that it is necessary to provisionally attach the property of the petitioner, for the purpose of protecting the interest of the revenue.

FACTS

The petitioner is registered as a taxable person under the GST Act engaged in the trading of Gold Bullion and Gold Jewellery. The Senior Intelligence Officer, Directorate General of Goods and Service Tax, Intelligence (DGGI), issued a summons to the petitioner under section 70 of the CGST Act, calling upon the petitioner to be present at their office in connection with an investigation. Thereafter, the petitioner’s place of business was searched and certain documents such as purchase / sale invoices, mobile phone, pen drive along with files containing certain papers were seized. Thereafter there was another search of the petitioner’s place of business, during which, gold bars along with computer, mobile phones, loose cash, documents were seized and duly recorded in the Mahazar. Yet another summon came to be issued under section 70 of the CGST Act, calling upon the petitioner to appear for an enquiry. Thereafter, an arrest memo with grounds for arrest was issued. The petitioner was arrested and remanded to judicial custody. The impugned order in Form DRC-22 came to be issued i.e. on the very day when the petitioner was granted bail, thereby attaching provisionally the petitioner’s bank accounts.

Petitioner submitted that the impugned attachment proceeding is bad for want of jurisdiction inasmuch as it did not disclose any tangible material leading to the formation of the opinion, that it is necessary to provisionally attach the property of the petitioner, for the purpose of protecting the interest of the Government warranting exercise of power under section 83 of the Act and that in the absence of tangible material which indicates a live link to the necessity to order a provisional attachment to protect the interest of the Revenue, the exercise of power under section 83 of the Act is without jurisdiction.

HELD

The Hon’ble Court held that the provisional attachment is an extreme measure that must be based on tangible material and must be necessary to protect revenue. The Court held that the attachment order in the present case was mechanical and failed to disclose any specific tangible material or justification for attachment. Since, the pendency of proceedings under Chapter XII, XIV or XV was not sufficient to justify provisional attachment and revenue did not establish that revenue could not be protected without attachment, the impugned order of provisionally attaching multiple bank accounts was to be set aside.

Punishable Offenses & Arrests under GST

INTRODUCTION

Since the implementation of the Goods and Services Tax (GST) in India in July 2017, enforcement actions have led to numerous arrests for offenses such as significant tax evasion, fraudulent input tax credit claims, and issuance of fake invoices. Data submitted to the Supreme Court indicates that from July 2017 to March 2024, the number of arrests under the GST framework varied annually, with 3 arrests in 2017-18 and peaking at 460 in 2020-21. In Gujarat alone, central tax officers booked 12,803 GST evasion cases between 2021 and 2024, resulting in 101 arrests. While these enforcement measures aim to deter large-scale fraud, concerns are often raised about potential coercion, especially when recoveries are significantly lower than the detected amounts, highlighting the need for a balanced approach between strict enforcement and maintaining a business-friendly compliance environment. Businesses and impacted individuals are often forced to knock the judicial forums to seek redressal in such situations. In a recent decision (Radhika Agarwal vs. UOI [(2025) 27 Centax 425 (S.C.)]), the Supreme Court has elaborately dealt with the constitutional validity of the provisions concerning power to arrest under the Customs and Goods and Services Tax (GST) law. This article analyses the provisions of arrest under the GST Law and the observations of the Supreme Court in this regard.

CONSTITUTIONAL VALIDITY

The Supreme Court has upheld the constitutional validity of the arrest provisions in Radhika Agarwal on the premise that the parliament, having  powers to make laws relating to levy & collection of GST, as a necessary corollary, has powers to  enact provisions for tax evasion in the form of  powers to summon, arrest and prosecute, which are ancillary and incidental to the power to levy and collect GST.

STATUTORY PROVISIONS RELATING TO ARRESTS

Section 69 of the CGST Act, 2017 deals with the powers to arrest. The relevant provisions are reproduced below:

(1) Where the Commissioner has reasons to believe that a person has committed any offence specified in clause (a) or clause (b) or clause (c) or clause (d) of sub-section (1) of section 132 which is punishable under clause (i) or (ii) of sub-section (1), or sub-section (2) of the said section, he may, by order, authorise any officer of central tax to arrest such person.

A plain reading of the above provisions shows that the provisions of arrest can be invoked only in the following cases:

a) The authorization to arrest must be granted by the Commissioner.

b) There must be reasons to believe that an offense is committed.

c) The offense must be a specified offense for which the powers to arrest can be invoked

REASONS TO BELIEVE

The essential condition for invoking the arrest provisions, as seen above, is that the Commissioner should have reasons to believe that an offense is committed. The phrase “reasons to believe” was recently analyzed by the Hon’ble Supreme Court in the case of Arvind Kejriwal vs. Directorate of Enforcement [(2025) 2 SCC 248] in the context of PMLA and applied on all fours to customs / GST matters in Radhika Agarwal’s case.

In Arvind Kejriwal’s case, the Hon’ble Supreme Court observes that the powers to arrest without a warrant is a drastic & extreme power. Therefore, the legislature had prescribed safeguards in the language of Section 19 (of PMLA) itself which act as exacting conditions as to how and when the power is exercisable. These safeguards include the requirement to have “material” in the possession of DoE, and based on such “material”, the authorised officer must form an opinion and record in writing their “reasons to believe” that the person arrested was “guilty” of an offence punishable under the PMLA. More importantly, the Supreme Court has held that not only the “grounds of arrest”, but the “reasons to believe” must also be furnished to the arrested persons. In simple words, the “reasons to believe” cannot be some concocted grounds at the whims and fancies of the authorities. It must be based on credible evidence admissible before the Court of law.

The court has held the above principles equally applicable to customs / GST matters. More leverage has been accorded to existence of evidence to form a reason to believe for the simple reason that the Commissioner is not only required to establish whether an offense is committed or not, he also needs to classify the offense as cognizable or non-cognizable. In fact, to do so, there must be a computation or explanation, based on various factors, such as goods seized. Such a level of detail is critical during judicial review of the exercise. This requirement is also laid down by the Board vide Instruction 2/2022-23 dated 17th August, 2022 based on the decision in Siddharth vs. State of UP [(2022) 1 SCC 676] wherein para 3 lays down the specific parameters for its’ Officers:

3.2 Since arrest impinges on the personal liberty of an individual, the power to arrest must be exercised carefully. The arrest should not be made in routine and mechanical manner. Even if all the legal conditions precedent to arrest mentioned in Section 132 of the CGST Act, 2017 are fulfilled, that will not, ipso facto, mean that an arrest must be made. Once the legal ingredients of the offence are made out, the Commissioner or the competent authority must then determine if the answer to any or some of the following questions is in the affirmative:

3.2.1 Whether the person was concerned in the non-bailable offence or credible information has been received, or a reasonable suspicion exists, of his having been so concerned?

3.2.2 Whether arrest is necessary to ensure proper investigation of the offence?
3.2.3 Whether the person, if not restricted, is likely to tamper the course of further investigation or is likely to tamper with evidence or intimidate or influence witnesses?

3.2.4 Whether person is mastermind or key operator effecting proxy / benami transaction in the name of dummy GSTIN or non-existent persons, etc. for passing fraudulent input tax credit etc.?

3.2.5 Unless such person is arrested, his presence before investigating officer cannot be ensured.

3.3 Approval to arrest should be granted only where the intent to evade tax or commit acts leading to availment or utilization of wrongful Input Tax Credit or fraudulent refund of tax or failure to pay amount collected as tax as specified in sub-section (1) of Section 132 of the CGST Act 2017, is evident and element of mens rea / guilty mind is palpable.

3.4 Thus, the relevant factors before deciding to arrest a person, apart from fulfillment of the legal requirements, must be that the need to ensure proper investigation and prevent the possibility of tampering with evidence or intimidating or influencing witnesses exists.

3.5 Arrest should, however, not be resorted to in cases of technical nature i.e. where the demand of tax is based on a difference of opinion regarding interpretation of Law. The prevalent practice of assessment could also be one of the determining factors while ascribing intention to evade tax to the alleged offender. Other factors influencing the decision to arrest could be if the alleged offender is co-operating in the investigation, viz. compliance to summons, furnishing of documents called for, not giving evasive replies, voluntary payment of tax etc.

The Supreme Court in Radhika Agarwal’s case reiterates the above requirements and holds that department’s authority to arrest hinges on satisfying these statutory thresholds (para 44). Infact, it is held that the “reasons to believe” can be subject to judicial review as arrest often involves contestation between the fundamental right to life and liberty of individuals against the public purpose of punishing the guilty. However, it has held that it cannot amount to a review on merits. Such an exercise, in all cases, shall be restricted to the review of material in possession that forms the basis for reasons to believe.

In Dharmendra Agarwal vs. UOI [[2025] 170 taxmann.com 558 (Gauhati)], the non-determination of liability by the respondent authorities before executing the arrest was one of the reasons for the grant of bail. In KshitijGhildiyal vs. DGGI [[2024] 169 taxmann.com 446 (Delhi)], bail was granted since the grounds for arrest were not provided while making the arrest. Post the decision in Kshitij Ghildiyal, the CBIC issued instruction 1/2025-GST dated 13th January, 2025 making it mandatory for the arresting officer to provide the grounds of arrest.

PUNISHABLE OFFENSES

Section 69 requires that the Commissioner must have reasons to believe that an offense is committed. While the statute does not define the term “offense”, section 3(38) of the General Clauses Act, 1897 defines it to mean any act or omission made punishable by any law for the time being in force. Such acts, which amount to an offense are covered u/s 132 of the CGST Act, 2017.

A perusal of the first limb of section 132 (1) brings out an important distinction when compared with section 69. It reads as follows:

(1) [Whoever commits, or causes to commit and retain the benefits arising out of, any of the following offences], namely:—

The distinction is vis-à-vis the applicability of the section. Section 69 applies to an offense committed by a person, while section 132 applies to a person committing, or causing to commit and retain the benefits arising out of the listed offenses. In other words, only a person who commits an offense can be arrested u/s 69 and not the person causing the offense to be committed, i.e., an auxiliary to a crime.

The next question that arises is the interpretation of applicability of section 132(1). The above extracts of section 132(1) can be interpreted in two different ways:

While the first interpretation substantially restricts the applicability of section 132, it may not stand judicial scrutiny. The importance of punctuation marks in interpreting statutes was recently examined by the Hon’ble Supreme Court in ShapoorjiPallonji& Company Private Limited [(2023) 11 Centax 180 (S.C.)] as follows:

27. In the present case, the use of a semicolon is not a trivial matter but a deliberate inclusion with a clear intention to differentiate it from sub-clause (ii). Further, it can be observed upon a plain and literal reading of clause 2(s) that while there is a semicolon after sub-clause (i), sub-clause (ii) closes with a comma. This essentially supports the only possible construction that the use of a comma after sub-clause (ii) relates it with the long line provided after that and, by no stretch of imagination, the application of the long line can be extended to sub-clause (i), the scope of which ends with the semicolon. We are, therefore, of the opinion that the long line of clause 2(s) governs only sub-clause (ii) and not sub-clause (i) because of the simple reason that the introduction of semicolon after sub-clause (i), followed by the word “or”, has established it as an independent category, thereby making it distinct from sub-clause (ii). If the author wanted both these parts to be read together, there is no plausible reason as to why it did not use the word “and” and without the punctuation semicolon. While the Clarification Notification introduced an amended version of clause 2(s), the whole canvas was open for the author to define “governmental authority” whichever way it wished; however, “governmental authority” was re-defined with a purpose to make the clause workable in contra-distinction to the earlier definition. Therefore, we cannot overstep and interpret “or” as “and” so as to allow the alternative outlined in clause 2(s) to vanish.

Therefore, the second interpretation seems more plausible. This takes us to the question of the difference between “commit” & “causes to commit”. The term “commit” refers to the person who has committed the offense while “causes to commit” refers to the person who influences or motivates the person committing the offense. As such, a person who supports / sponsors such offenses though does not commit them, will be equally liable. However, the onus to prove that the offense was caused by such a person will be with the Department. It would also be necessary for the Department to demonstrate that the person causing the offense also retains the benefits derived from the offense so caused.

Section 132 lists the following acts as punishable offenses, providing for arrest and imposition of fines.

  •  Supplying any goods or services without the issuance of any invoice, with an intention to evade tax [132(1)(a)]

– The phrase is self-explanatory and is intended to cover situations of clandestine removal of goods, under-reporting of services, etc. it may be noted that the situation covered here deals with supply of goods without issuance of invoice and is not intended to cover situations of interpretation relating to classification, valuation, applicability of tax rate or exemption notification, etc.

– Further, for this clause to trigger, the Commissioner must establish “intent to evade tax”. The ‘intention to evade’ assumes some positive act on the part of the alleged person. It is a settled law that the burden to prove the allegation shall be on the accuser, i.e., the Department.

  •  Issuing any invoice or bill without supply of goods or services or both leading to wrongful availment or utilization of ITC or refund of tax [132(1)(b)]

– This clause refers to a situation where a supplier issues any invoice or bill without the supply of any goods or services, resulting in the wrong availment / utilization of ITC or refund. What is essential for this clause to trigger is that the invoice issued without any underlying supply shall lead to a wrong availment / utilisation of ITC or refund of the tax. If the recipient has not availed / utilized ITC or claimed a refund of such tax, the offense may not arise. Therefore, for the Commissioner to have a reason to believe such an offense is committed, there must exist evidence to that effect. In the absence of such evidence, an allegation under this clause may not survive. It may be noted that intention to evade tax is not a pre-condition for offense under this clause.

  •  Avails ITC using the invoice or bill referred to above or fraudulently avails ITC without any invoice or bill [132(1)(c)]

– This clause is linked with clause (b). While clause (b) is from the supplier’s perspective, this clause is from the recipient’s perspective and provides that when a person avails ITC on an invoice issued by the supplier without any underlying supply or avails ITC without any invoice or bill.

– Let us first look at an offense where ITC is claimed on the strength of an invoice without any underlying supply being received by the recipient. Generally, such offenses are detected based on the investigation undertaken at the suppliers’ end and notices are sent to all recipients of such supplier based on supplier’s statement. In such cases, based on such a statement, the Department proceeds with a preconceived notion that all supplies made by such suppliers are fake and therefore, the recipients have claimed wrong ITC. It is therefore imperative that in such cases, when the investigation starts, the recipient should make available all the evidence to justify the genuineness of the transactions, such as invoices, payment proofs, delivery challans, EWB, etc., The recipient should also invoke his right to cross-examine all such persons, whose statements are relied upon in such proceedings.

– The next situation covered under this clause is one where ITC is claimed without any invoice / bill. One of the conditions for claiming the ITC u/s 16 is that the recipient should have the tax invoice or prescribed document in his possession, which can be either the original copy or in the forms prescribed u/s 145 of the CGST Act, 2017. However, if any person claims ITC in contravention of this provision, an offense under this clause gets committed. The situation might change if the ITC claimed is already reversed, as the reversal of ITC amounts to non-taking of ITC in the first place, as held in Commissioner vs. Bombay Dyeing & Mfg. Co. Ltd. [2007 (215) E.L.T. 3 (S.C.)]

  •  Fails to pay the tax collected within three months from the date on which such payment becomes due [132(1)(d)]

– This clause refers to cases where a supplier collects GST but fails to deposit it with the Government. This can be either self-assessed liability (i.e., liability declared in GSTR-1 but not discharged) or liability not disclosed / discharged in return.

  •  Evades tax / fraudulently obtains refund by committing an offense not covered under (a) to (d) [132(1)(e)]

– This clause refers to a situation of tax evasion / fraudulent refunds (other than cases covered in (a) to (d)). Any instance of non-payment of tax/ fraudulent refund, which is not covered under clauses (a) to (d) may be covered under this clause. However, not all cases of non-payment/ erroneous refunds can be treated as tax evasion / fraudulent. In case of interpretation issues, bona-fide beliefs, etc. where there is no intention to evade / fraud the Government, the said sub-clause may not apply.

  •  Falsifies or substitutes financial records / produces fake accounts or documents or furnishes false information with an intention to evade tax [132(1)(f)]

– This clause specifically covers cases where a person falsifies / substitutes financial records / produces fake accounts or documents or false information with an intention to evade tax. The documentary evidence to support an allegation that a person has committed this act with an intention to evade tax must exist beforehand.

  •  Obstructs or prevents any officer in the discharge of his duties under this Act [132(1) (g)] – omitted w.e.f 1st October, 2023

– As a trade-friendly measure, the above offense has been decriminalized w.e.f 1st October, 2023.

  •  Acquires possession of, or in any way concerns himself in transporting, removing, depositing, keeping, concealing, supplying or purchasing or in any other manner deals with, any goods which he knows or has reasons to believe are liable to confiscation [132(1)(h)]

– This clause refers to cases where goods are liable to be confiscated u/s 130 of the CGST Act, 2017 which is generally triggered in the following cases:

(i) Supply or receipt of any goods in contravention of any of the provisions of this Act or the rules made thereunder with intent to evade payment of tax; or

(ii) Non-accounting of any goods on which he is liable to pay tax under this Act; or

(iii) Supply of goods liable to tax under this Act without having applied for registration; or

(iv) Contravention of any of the provisions of this Act or the rules made thereunder with intent to evade payment of tax; or

(v) Use of any conveyance as a means of transport for carriage of goods in contravention of the provisions of this Act or the rules made thereunder unless the owner of the conveyance proves that it was so used without the knowledge or connivance of the owner himself, his agent, if any, and the person in charge of the conveyance.

– In addition to the above, this clause shall also apply to service providers providing warehousing services if it is found that they are storing goods that are liable to confiscation.

  •  Receives or is in any way concerned with the supply of, or in any other manner deals with, any services which he knows or has reasons to believe are in contravention of any provisions of this Act or rules made thereunder. [132(1)(i)]

– This clause refers to cases where a person either receives or supplies any service in contravention of any provisions of this Act or rules. An example of contravention would be when a person, though liable to register under GST, does not register and continues to supply service. Such a supply would be in contravention of the provisions of section 22.

  •  Tampers with or destroys any material evidence or documents [132(1)(j)] – omitted w.e.f 1st October, 2023

– As a trade-friendly measure, the above offense has been decriminalized w.e.f 1st October, 2023

  •  Failure to supply any information which he is required to supply under this Act or the rules made thereunder or (unless with a reasonable belief, the burden of proving which shall be upon him, that the information supplied by him is true) supplies false information [132 (1)(k)]– omitted w.e.f 1st October, 2023

– As a trade-friendly measure, the above offense has been decriminalized w.e.f 1st October, 2023

  •  Attempts to commit, or abet the commission of any of the offenses mentioned above [[132 (1)(l)].

– This clause covers cases where a person aids or abets in the commission of any offense specified in section 132. In one of the cases, a tax practitioner was arrested alleging he had facilitated registration based on fake & vague documents for evading GST, thus abetting the commission of an offense. (Satya Prakash Singh vs. State of Jharkhand [2025] 170 taxmann.com 684 (Jharkhand)].

A perusal of section 132 makes it clear that all cases of non-payment of tax / short-payment of tax/ wrong availment or utilization of ITC do not trigger the arrest provisions. Only when an offense specified under specific clauses and exceeding specified monetary limit is committed can a person be arrested. Therefore, genuine cases involving interpretation issues, such as rate classification, valuation, exemption eligibility, ITC eligibility, etc. cannot be covered under the offenses prescribed u/s 132 & in such cases, arrest provisions cannot be invoked. This shows that cases involving interpretation issues are given more flexibility and such cases cannot be treated as a punishable offense. This has also been clarified by instruction 2/2022-23-GST dated 17th August, 2022.

PUNISHMENTS

The punishment for the above offenses, based on the tax quantum involved, is prescribed u/s 132(1), as follows:

Section 132(2) further provides that a repeat offender shall be liable to imprisonment for a term that may extend up to 5 years with a fine for each subsequent offense. However, no person shall be prosecuted without the previous sanction of the Commissioner [section 132 (6)].

It is interesting to note that the punishment is prescribed only for offenses specified in clauses (b), (c), (e), and (f). Before 1st October, 2023, sub clause (iii) referred to any other offense, which has been now substituted with an offense under clause (b). Therefore, while the prescribed acts are offenses, no punishment is prescribed for them. Therefore, to that extent, even if the person commits the said acts, he cannot be punished, since no such punishment is prescribed under the law. In this regard, one may refer to Vijay Singh vs. State of UP [2012 (5) SCC 242]:

16. Undoubtedly, in a civilized society governed by rule of law, the punishment not prescribed under the statutory rules cannot be imposed. Principle enshrined in Criminal Jurisprudence to this effect is prescribed in legal maxim nullapoena sine lege which means that a person should not be made to suffer penalty except for a clear breach of existing law. In S. Khushboo v. Kanniammal&Anr., AIR 2010 SC 3196, this Court has held that a person cannot be tried for an alleged offence unless the Legislature has made it punishable by law and it falls within the offence as defined under Sections 40, 41 and 42 of the Indian Penal Code, 1860, Section 2(n) of Code of Criminal Procedure 1973, or Section 3(38) of the General Clauses Act, 1897. The same analogy can be drawn in the instant case though the matter is not criminal in nature.

OFFENSES – COGNIZABLE & NON-COGNIZABLE

In general, all the offenses are declared as non-cognizable &bailable offenses [section 132 (4)] except for the offenses covered under clause (a) to (d) which are punishable under (i) above [section 132(5)].

The Code of Criminal Procedure, 1973 classifies an offense as either “cognizable” or “non-cognizable”. The distinction between cognizable and non-cognizable offenses is in the manner of arrest. An arrest for a cognizable offense can be made without an arrest, i.e., a person can be arrested without a warrant. In contrast, the arrest in case of a non-cognizable offense can be made only based on an arrest warrant. The classification of an offense into cognizable & non-cognizable depends on the gravity of the offense and is provided u/s 132.

SPECIFIED OFFENSES – WHERE A PERSON CAN BE ARRESTED U/S 69

The third limb of section 69, to invoke the arrest provisions, is that the Commissioner should have reasons to believe that a specified offense is committed. While section 132 provides a list of acts as offenses, the arrest provisions can be invoked only in case of specified offenses, as follows:

a) An offense under clauses (a) to (d) of section 132(1) should have been committed.

b) The offense must be punishable under sub-clause (i) section 132, i.e., the tax amount involved exceeds ₹5 crores, making the offense cognizable & non-bailable.
c) The offense must be punishable under sub-clause (i) section 132, i.e., the tax amount involved exceeds ₹2.50 crores but is less than ₹5 crores, making the offense non-cognizable &bailable.

In other words, the powers to arrest by the Commissioner can be exercised in cases of specified cognizable & non-cognizable offenses. However, when a person is authorized for a non-cognizable and therefore, a bailable offense based on the authorization issued by the Commissioner, such person arrested shall be admitted in bail, or in the default of bail, forwarded to the custody of the Magistrate until such time that a bail is furnished.

EXECUTING THE ARREST

Section 4(2) of the IPC, 1860 provides that the offenses covered under laws other than IPC, 1860 shall be investigated, inquired, tried, or otherwise dealt with under the CrPC, 1973 (“code”). Section 5 carves out a savings clause to clarify that the Code shall not affect any special / local law, or any special jurisdiction or powers conferred or special procedure prescribed unless there is a specific provision prescribed. In other words, the provisions of the Code would apply to the extent that there is no contrary provision in the special act or any special provision excluding the jurisdiction and applicability of the Code. In the context of GST, in Radhika Agarwal, it has been held that the provisions of the Code shall equally apply to customs’ offense and by extension, to GST as well.

As stated above, section 69 provides for cases where the Commissioner may authorize any officer of central tax to arrest a person. However, for other offenses, the GST law is silent. Hence, in such cases, the procedure prescribed under the Code shall apply. This takes us to the Code. Chapter V thereof deals with the arrest of persons. A perusal of Chapter V provides for arrest by a police officer. The question that arises is whether the GST officer is a police officer. This issue has been examined by Courts on multiple occasions1 and recently summarised in Radhika Agarwal wherein it has been held that GST officers are not police officers.

1 State of Punjab vs. Barkat Ram, (1962) 3 SCR 338, Ramesh Chandra Mehta vs.
 State of West Bengal, 
(1969) 2 SCR 461, Illias v. Collector of Customs (1969) 2 SCR 613, 
Tofan Singh vs. State of Tamil Nadu [(2s021) 4 SCC 1]

Therefore, while in cases covered u/s 69, the GST officers can execute the arrest, for all other offenses, the arrest can be executed only by a police officer. In such cases, the arrest can be executed by a police officer based on a complaint filed by the GST Officer (section 41 (b) of the code). However, as provided in section 132 (6), no person shall be prosecuted without the prior sanction of the Commissioner. Therefore, even for prosecution in other offenses, a prior sanction of the Commissioner is mandatory.

Once a person is arrested, either u/s 69 by a GST officer or a police officer, the arrested person shall be presented before a Magistrate within 24 hours of the arrest, excluding the traveling time between the place of arrest & the Magistrate’s Court. Even in case of arrests u/s 69, it is incumbent upon the arresting officer to admit the arrested person to bail, or in default of bail, forward it to the custody of the magistrate.

When a person is presented before the Magistrates’ Court, the Magistrate shall, if the investigation is not completed within 24 hours of the arrest and feels that further investigation is required, order that such arrested person must remain in police custody for not more than 15 days. However, in case of GST offenses, custody may be granted to the GST officers, as held in Directorate of Enforcement vs. Deepak Mahajan [(1994) 3 SCC 440].

A person arrested for offenses u/s 132 shall have all the rights, whether arrested u/s 69 by a GST officer / by a police office under Chapter V of the Code, such as:

a) The right to meet an advocate of his choice during the investigation, but not throughout the investigation and have such advocate present within a visual distance but not audible distance during the investigation (section 41D of the code).

b) The right to give information regarding such arrest and place where the arrested person is being held to any of his friends, relatives, or other person as may be disclosed or nominated by the arrested person (section 50A of the code)

c) The guidelines laid down in D K Basu vs. State of West Bengal [(1997) 1 SCC 416] must be stringently followed.

Similarly, the duties and obligations cast on a police officer under the Code shall equally apply to the GST officers. This includes the obligation to maintain a diary of investigation proceedings, taking reasonable care of the arrested persons’ health and safety, etc.,

Double jeopardy – can a person be subjected to simultaneous proceedings u/s 73/74 as well as section 69?

As stated above, there can be instances where proceedings u/s 73 or 74 have already been initiated. The question that arises is whether in such cases, proceedings u/s 69 alleging offenses u/s 132 can be initiated. In other words, can there be simultaneous civil & criminal proceedings for the same offense or not?

This issue has been dealt with in the case of Maqbool Hussain vs. State of Bombay [1983 (13) E.L.T. 1284 (S.C.)] wherein the Constitutional Bench held that sea customs authorities are not judicial tribunals. Therefore, proceedings by sea customs authorities do not constitute prosecution and the Orders passed by them did not constitute punishment. Therefore, separate criminal proceedings can be initiated against the accused for such offense and the same would not be hit by double jeopardy. This view was also followed by the Hon’ble Supreme Court in Leo Roy Frey vs. Superintendent [1983 (13) E.L.T. 1302 (S.C.)] and RadheshyamKejriwal [[2011 (266) ELT 294 (SC)]]. One may also refer to instruction 4/2022-23 dated 1st September, 2022 which deals with this aspect of parallel criminal & adjudication proceedings.

In fact, relying on Makemytrip (India) Private Limited vs. UOI [2016 SCC OnLine Del 4951], one of the arguments raised in Radhika Agarwal was that prosecution can be done only after adjudication proceedings are completed. However, this argument has been rejected and it has been held that there could be cases where even without a formal order of assessment, the department / Revenue is certain that it is a case of offense under clauses (a) to (d) to sub-section (1) of Section 132 and the amount of tax evaded, etc. falls within clause (i) of sub-section (1) to Section 132 of the GST Acts with sufficient degree of certainty. In such cases, the Commissioner may authorise arrest when he is able to ascertain and record reasons to believe. This reiterates that there is no relationship between the adjudication proceedings or prosecution for offenses.

PRE-ARREST PROTECTION

Any person apprehending prosecution and arrest has a right to apply for anticipatory bail. In Radhika Agarwal’s case, it has been held as follows:

70. We also wish to clarify that the power to grant anticipatory bail arises when there is apprehension of arrest. This power, vested in the courts under the Code, affirms the right to life and liberty under Article 21 of the Constitution to protect persons from being arrested. Thus, in Gurbaksh Singh Sibbia (supra), this Court had held that when a person complains of apprehension of arrest and approaches for an order of protection, such application when based upon facts which are not vague or general allegations, should be considered by the court to evaluate the threat of apprehension and its gravity or seriousness. In appropriate cases, application for anticipatory bail can be allowed, which may also be conditional. It is not essential that the application for anticipatory bail should be moved only after an FIR is filed, as long as facts are clear and there is a reasonable basis for apprehending arrest. This principle was confirmed recently by a Constitution Bench of Five Judges of this Court in Sushila Aggarwal and others v. State (NCT of Delhi) and Another (2020) 5 SCC 1. Some decisions State of Gujarat v. ChoodamaniParmeshwaranIyer and Another, 2023 SCC OnLine SC 1043; Bharat Bhushan v. Director General of GST Intelligence, Nagpur Zonal Unit Through Its Investigating officer, SLP (Crl.) No. 8525/2024 of this Court in the context of GST Acts which are contrary to the aforesaid ratio should not be treated as binding.

POST-ARREST STEPS

Once a person is arrested, pending trial, he shall remain in custody unless granted bail. Chapter XXXIII of the Code deals with provisions relating to bail.

Section 436 of the code provides that a person arrested for a bailable offense shall be released on bail. Similarly, for non-bailable offenses, section 437 of the code provides that the bail may be granted subject to the exceptions provided therein (such as cases where the punishment for the alleged offense is death or life imprisonment, or a repeat offender). However, in any case, when a person undergoes detention for more than one-half of the maximum period of imprisonment specified for that offense, he shall be released by the Court on his bond with or without sureties (section 436A of the code).

In addition, there is a settled principle of law that bail is the norm, jail is an exception, which has been upheld for economic offenses (see Prem Prakash vs. UOI).

There are many reported cases where bail has been granted for non-bailable offenses also:

  •  In Ashutosh Garg vs. UOI [[2024] 164 taxmann.com 767 (SC)], the bail has been granted upon having served a substantial time in detention, pending trial.
  •  In yet another case2, the bail was granted since the co-accused was granted bail.
  •  In DGGI vs. Harsh Vinodbhai Patel [Director General of Goods and Service Tax Intelligence, Ahmedabad vs. Harsh Vinodbhai Patel [2024] 164 taxmann.com 410 (SC)], bail was granted since all documentary evidences and other material were seized by the investigation agency, the presence of accused was not necessary for the investigation and trial was unlikely to commence and conclude in near future. Similar view was followed in the case of Ratnambar Kaushik vs. UOI [[2022] 145 taxmann.com 296 (SC)].
  •  In Natwar Kumar Jalan vs. UOI [[2025] 171 taxmann.com 112 (Gauhati)], one of the reasons for a grant of bail was that the accused was not a flight risk.
2 Ronaldo Earnest Ignatio vs. State of Odisha [[2024] 167 taxmann.com 418 (Orissa)]

CONCLUSIONS

The Supreme Court, while upholding the legislative competence of the Parliament to incorporate criminal provisions under GST law, has delivered a balanced judgment reinforcing constitutional safeguards to protect personal liberty. The decision in Radhika Agarwal also imposes a glaring requirement on the tax officers to invoke the arrest provisions only based on substantial evidence, which can be subjected to judicial review and reiterates the rights of the arrested persons, by following the guidelines laid down in D K Basu, Deepak Mahajan, etc, This shows that Courts shall, as they always have, continue to maintain the balance between the curtailment of tax evasion and the liberty of the individual. On the other hand, taxpayers will have to be equivalently vigilant with their tax practices, i.e., filing of returns, responding to department notices and submissions before the department, and so on, and in case of impending prosecution and / or arrests, proactively take preventive steps.

Recent Developments in GST

A. NOTIFICATIONS

i) Notification No.7/2025-Central Tax dated 23rd January, 2025

By above notification the amendments are made in CGST Rules regarding grant of temporary identification number.

ii) Notification No.8/2025-Central Tax dated 23rd January, 2025

By above notification waiver for late fees for GSTR-9 is provided.

iii) Notification No.9/2025-Central Tax dated 11th February, 2025

By above notification, date of coming into force of rules 2, 8, 24, 27, 32, 37, 38 of the CGST (Amendment) Rules, 2024 is specified.

B. CIRCULARS

(i) Clarification on regularising payment of GST on co-insurance premium — Circular no.244/01/2025-GST dated 28th January, 2025.

By above circular the clarification is given regarding regularizing payment of GST on co-insurance premium apportioned by the lead insurer to the co-insurer and on ceding / re-insurance commission deducted from the reinsurance premium paid by the insurer to the reinsurer.

(ii) Clarification on applicability of GST on certain services — Circular no.245/02/2025-GST dated 28th January, 2025.

By above circular, clarifications regarding applicability of GST on certain services are given.

(iii) Clarification on late fees — Circular no.246/03/2025-GST dated 30th January, 2025.

By above circular, clarification is given about applicability of late fee for delay in furnishing of FORM GSTR-9C.

C. INSTRUCTIONS

(i) The CBIC has issued instruction No.2/2025-GST dated 7th February, 2025 by which instruction is given about procedure to be followed in department appeal filed against interest and/or penalty only, with relation to Section 128A of the CGST Act, 2017.

D. ADVANCE RULINGS

Classification – Instant Mix Flour
Ramdev Food Products Pvt. Ltd. (AAR Order No. GUJ/GAAAR/APPEAL/2025/01 (IN APPLICATION NO. Advance Ruling/SGST&CGST/2021/AR/17) Dated: 22nd January, 2025)(GUJ)

The present appeal was filed against the Advance Ruling No. GUJ/GAAR/R/29/2021 dated 19th July, 2021, passed by the Gujarat Authority for Advance Ruling [GAAR].

The appellant is engaged in the business of manufacture and supply of the below mentioned ten instant mix flours viz.

The process undertaken for manufacturing & selling the above products was explained as under:

“(a) that they purchase food grains and pulses from vendors.

(b) that such food grains/pulses are fumigated and cleaned for removal of wastage.

(c) that food grains/pulses are then grinded and converted into flour.

(d) that flour is sieved for removal of impurities.

(e) that flour is then mixed with other ancillary ingredients such as salt, spices, etc. The proportion of flour in most of the instant mixes is ranging from 70% to 90%.

(f) that flour mix is then subjected to quality inspection and testing.

(g) that flour mix is thereafter packaged and stored for dispatch.”

The table showing constituent components of instant mix flour was also submitted. The constituents included dried Leguminous Vegetable Flours, Rice & Wheat Flours, Additives, Spices etc.

The appellant’s submission was that the instant flour mix retains its identity as flour and therefore they are classifiable under heading 1101, 1102 or 1106, as the case may be, based on the dominant flour component.

With above information, appellant has sought ruling about classification of above products.

The ld. AAR has ruled that above products merits classification at HSN 2106 90 attracting 18 per cent GST as per Sl. No. 23 of Schedule III to the Notification No.01/2017-Central Tax (Rate) dated 28th June, 2017.

The instant appeal was against the above ruling. The appellant reiterated its contentions about products being covered by heading 1101, 1102 or 1106 and liable to tax @ 5 per cent.

The appellant supported its contentions mainly on ground that the instant mix are mixture of flours like Black Gram (Urad Dal) and / or Rice and / or Refined Wheat flour and / or Bengal Gram (Chana Dal) and / or Green Gram (Moong Dal) with addition of very small amount of additives like iodised Salt and / or Sugar and/or Acidity regulator (Citric acid INS 330) and / or Raising agent (Sodium bicarbonate INS 500(ii)) and that it does not contain any spices and hence should be covered as flours under Chapter 11 and liable to GST @ 5 per cent;

The ld. AAAR referred to heading 1101, 1102 and 1106 and also Explanatory notes to HSN in respect of heading 1101 and 1102.

After referring to headings in detail, the ld. AAAR observed that the classification of the product is required to be determined in accordance with the terms of the headings. As per chapter heading 1106, it covers Flour, Meal and Powder of the dried leguminous vegetables of Chapter Heading 07.13 and other specified products. The ld. AAAR further observed that as the products of the appellant contain other ingredients like Iodised salt, Acidity regulator (INS 330), Raising agent (INS 500(ii)) in different proportions, which are not mentioned in the chapter heading 1106 or the relevant explanatory notes of HSN, the said products are not covered under Chapter Heading 1106.

The contention about classification under chapter heading 1101 and 1102 also rejected by the ld. AAAR observing that even if flour improved by adding of small quantity of specified substance remains under such heading the same will not be correct when substances (other than specified substances) are added to the flours with a view to use as ‘food preparations’, and said flour gets excluded from chapter heading 1101 or 1102.

The reliance of appellant on VAT determination order also held not applicable in view of change in classification entries.

Finally, the ld. AAAR approved the classification done by ld. AAR and rejected the appeal.

Exemption – Services to Panchayat / Municipality /State Government

Data Processing Forms P. Ltd. (AAR Order No. GUJ/GAAAR/APPEAL/2025/03 (IN APPLICATION NO. Advance Ruling/SGST&CGST/2022/AR/10) Dated: 22nd January, 2025)(GUJ)

The present appeal was filed against the Advance Ruling No. GUJ/GAAR/R/2022/43 dated 28th September, 2022.

The appellant is engaged in the manufacturing of computer forms, cut sheets, printed forms & is also engaged in trading of printers, cartridges, laptops, barcode stickers, OMR Sheet and educational booklets etc.

The appellant provides below-mentioned services to Gujarat Public Service Commission (GPSC) and Gujarat Panchayat Service Selection Board (GPSSB);

The appellant was of the view that the aforementioned services provided to GPSC and GPSSB are exempt in terms of entries 3 and 3 A of the Notification 12/2017-CT (R) and sought ruling from the ld. AAR. The ld. AAR passed ruling that the appellant is not eligible to the exemption under entry No. 3 and 3A of notification No. 12/2017-CT (R) dated 28th June, 2017 as amended, for supply of service to the Gujarat Panchayat Service Selection Board or to GPSC.

This appeal was against the above ruling of AAR. The main argument of the appellant was that GPSSB is an integral part of Panchayat system & therefore a local authority and it is covered under the provisions of article 243G and entitled for the benefit of entries 3 & 3A of the notification.

Similarly, in respect of GPSC the argument of appellant was that, it is a constitutional body having its own identity and 100% controlled, financed & managed by the State Government and therefore it is ‘State Government’ attracting above entries 3 and 3A.

The ld. AAAR noted that in terms of the entry 3 of notification No. 12/2017-CT (R), as amended, pure services [excluding works contract services or other composite services involving supply of any goods], provided to a Central Government, State Government, Union territory or local authority by way of any activity in relation to any function entrusted to a Panchayat under article 243G or to a Municipality under article 243W of the Constitution of India, are exempt. Similarly, in terms of entry 3A of notification, composite supply of goods and services, in which the value of supply of goods constitutes not more than 25 per cent of the value of the said composite supply provided to the Central Government, State Government or Union territory or local authority by way of any activity in relation to any function entrusted to Panchayat under article 243G or to Municipality under article 243W of the Constitution, are exempt.

The ld. AAAR also noted principle of interpretation that the exemption Notification is required to be interpreted strictly.

The ld. AAAR noted that appellant has relied on the definition of ‘local authority’ u/s 3(31) of the General Clauses Act. The ld. AAAR noted that since the supply to GPSSB is composite supply, it is required to be covered by entry 3A. The ld. AAAR observed that the GPSSB is neither a Central / State Government nor a Union territory. The ld. AAAR also held that it is not local authority as defined u/s.2(69) of the CGST Act. The ld. AAAR held that since the primary condition of the composite services having been provided to a Central Government, State Government, Union territory or local authority is not getting satisfied, the appellant is not eligible for the benefit of the notification and confirmed ruling of AAR about GPSSB.

In respect of GPSC, the ld. AAAR noted the contention of the appellant that GPSC is a constitutional body having its own identity and 100 per cent controlled, financed & managed by the State Government which amounts to ‘State Government’.

In this respect the ld. AAAR referred to definition of term ‘State Government’ under the General Clauses Act, 1897, which reads as under:

“(60) “State Government”, –
(a) as respects anything done before the commencement of the Constitution, shall mean, in a Part A State, the Provincial Government of the corresponding Province, in a Part B State, the authority or person authorised at the relevant date to exercise executive government in the corresponding Acceding State, and in a Part C State, the Central Government;

(b) as respects anything done [after the commencement of the Constitution and before the commencement of the Constitution (Seventh Amendment) Act, 1956], shall mean, in a Part A State, the Governor, in a Part B State, the Rajpramukh, and in a Part C State, the Central Government;

[(c) as respects anything done or to be done after the commencement of the Constitution (Seventh Amendment) Act, 1956, shall mean, in a State, the Governor, and in a Union territory, the Central Government;

and shall, in relation to functions entrusted under article 258A of the Constitution to the Government of India, include the Central Government acting within the scope of the authority given to it under that article];”

The ld. AAAR observed that in view of the above definition, GPSC is not State Government and confirmed ruling of AAR. The judgments cited by the appellant were distinguished. The ld. AAAR rejected the appeal confirming the ruling of ld. AAR.

Classification — “Nonwoven Coated Fabrics”

Om Vinyls Pvt. Ltd. (AAR Order No. GUJ/GAAAR/APPEAL/2024/21 (IN APPLICATION NO. Advance Ruling/SGST&CGST/2023/AR/22) Dated: 6th September, 2024)(Guj)

The applicant explained the nature of the product with manufacturing process as under:

“Nonwoven fabric is manufactured from PVC films, adhesive gum and nonwoven in their factory;

* that manufactured film is ready for further process called lamination / thermoforming;

* that cellular leather cloth/thermoforming is used widely for auto tops [canopy], sports shoe upper by laminating a thin PVC film with another layer of calendered sheeting containing blowing agent with textile backing; that this combination can be expanded in a separate stenter / foaming oven;

* a drum heated to about 180o C is driven & provided with a rubber coloured pressure roller to press the layers together & eliminate trapped air;

* the laminated combination is made to travel inside the heated chambers where the blowing agent is activated & controlled expansion is initiated in the middle calendered film;

* the process matches the standard approved by BIS; that the product is used mainly in outdoor application where the weather condition is uncertain.”

It is informed that components like, PVC resin, DOP / DIN, CPS 52 per cent, CA CO3, Stabilisers, Anti-oxidants, Pigment & Poly propylene are used in the process.

The uses of non-woven fabrics were also mentioned like use as table cover, TV cover, Sofa cover, fridge cover etc.

The appellant has raised following questions.

“1. Whether ‘nonwoven coated fabrics- coated, laminated or impregnated with PVC falls under HSN 56031400?

2. If ‘nonwoven coated fabrics- coated, laminated or impregnated with PVC’

does not fall under HSN 56031400 then it will fall under which heading of chapter 50?

3. If ‘nonwoven coated fabrics -coated, laminated or impregnated with PVC’

does not fall under HSN 56031400 then it will fall under which heading of chapter 39?”

In personal hearing the applicant explained composition of product as under:

“PVC film      55% Rs.12.60
Gum               29% Rs. 6.40
Nonwoven     16% Rs. 3.00
— ———-
Total            100% Rs. 20”

The ld. AAR referred to relevant material under Customs Tariff Act,1975, HSN, Circular etc. and reproduced same in AR.

Upon conjoint reading of the manufacturing process, the section notes, chapter notes, etc., the ld. AAR observed that the nonwoven coated fabrics — coated, laminated or impregnated with PVC, will not fall under chapter 56.

On going through the HSN explanatory notes of chapter 50, the ld. AAR observed that generally speaking chapter 50 covers silk, including mixed textile materials classified as silk, at its various stages of manufacture, from the raw materials to the woven fabrics and it also includes silk worm gut. The ld. AAR also observed that the applicant’s product nonwoven coated fabrics — coated, laminated or impregnated with PVC, is a combination of nonwoven fabrics, adhesive coat and PVC sheet, thereby not meeting the primary requirement for falling under chapter 50. In view of the foregoing, the ld. AAR held that the product of the applicant would not fall within the ambit of chapter 50 also.

After going through the information, the ld. AAR held that since the product of the applicant is a mixture of various constituents, the product is to be classified as if they consisted of the material or component which gives them their essential character. Observing that the major constituent is PVC sheet which is 120 GSM out of the total 240 GSM, the ld. AAR held that the goods of the applicant viz nonwoven coated fabrics — coated, laminated or impregnated with PVC would fall under chapter 39.

About bags, ld. AAR followed circular no. 80/54/2018-GST dated 31st December, 2018 and held that Non-Woven Bags laminated with BOPP would be classifiable as plastic bags under tariff item 3923 and would attract 18 per cent GST.

Accordingly, the ld. AAR passed ruling that the product, nonwoven coated fabrics -coated, laminated or impregnated with PVC will fall under chapter heading 39 and the products [a] table cover, [b] television cover [c] washing machine cover would fall within the ambit of tariff item 392690 and would attract 18 per cent GST, while bags would be classifiable under tariff item 3923 and would attract 18 per cent GST.

CLASSIFICATION – “SLACK ADJUSTERS”

Madras Engineering Industries Pvt. Ltd. (AR Order No. Advance Ruling No.27/ARA/2024 Dated: 5th December, 2024)(TN)

The facts are that M/s. Madras Engineering Industries Private Limited manufactures ‘Slack Adjusters’ and supplies the same to Truck, Bus and Trailer axle manufacturers in India. They supply these slack adjusters for the replacement market through their vast and well spread distribution arrangement.

The applicant further informed that Slack Adjusters under HSN code 87089900 are charged at 28 per cent as they are used for Trucks & Bus applications for both OE fitment and in the aftermarket. It was further informed that Slack Adjusters developed exclusively for trailer axle fitments are classified under HSN Code 87169010 and charged at 18 per cent for both OE fitment and for aftermarket requirements.

The difference between two products was explained as under:

Based on the above background, the applicant asked whether the HSN code followed and whether the GST rate applied for stack adjusters used in the truck and trailer applications is proper or not?

The ld. AAR referred to nature and use of product as under:

“7.1. The applicant is in the business of manufacturing and supplying ‘Slack Adjusters’ used in the braking system of Buses, Trucks and Trailers. Slack Adjuster is a part of a vehicle braking system and hence is an essential safety critical part of the vehicle. Slack adjusters are connected to the brake chamber push rod and Scam Shaft to convert lateral movement of brake chamber pushrod to rotational movement and rotate the S-cam shaft while brakes are applied. This is used to release and bring back the S-cam shaft to its original position when the brakes are applied. These slack adjusters are normally used in heavy vehicles namely, buses and trucks. It is also used in the trailers where the load carried is substantial. The specification of the slack adjusters used in ‘Buses & Trucks’ and in ‘Trailers’ are distinguishable as explained by the applicant.”

In order to arrive at an appropriate classification of the item used in the motor vehicle, the ld. AAR referred to the tariff classification as issued by the CBIC read with its schedules, guided by interpretative rules, section notes, Chapter Notes supported by the Explanatory Notes to the HSN.

In respect of Slack Adjuster for trailer, the ld. AAR referred to the entries for trailer. The ld. AAR observed that, a trailer is a wheeled vehicle attached to another powered vehicle for movement of goods and cargo. HSN 8716 exclusively deals with Trailers, Semi-trailers and other vehicles not mechanically propelled. As the HSN provides for a separate classification for trailers, semi-trailers and other such vehicles, the slack adjusters used exclusively in the braking system of trailers are rightly classified as ‘Parts and accessories of trailers’ under HSN 87169010. Accordingly, the ld. AAR approved classification made by applicant.

Regarding Slack adjusters used in the braking system of Buses and Trucks supplied to both, OEMs and aftermarket Sales, as ‘Parts and accessories of motor vehicles under HSN 87089900, the ld. AAR approved GST rate of 28 per cent.

Thus the ld. AAR upheld slack adjusters used in the braking system of a Trailer supplied to OEMs and aftermarket Sales as ‘Parts and accessories of trailers’ under HSN 87169010 and its GST rate of 18 per cent.

The ld. AAR mentioned that the applicant should ensure to adopt correct classification of the product as the slack adjusters supplied are different for both ‘buses & trucks’ and ‘trailer’ and accordingly allowed AR in favour of applicant.

SALE FROM FTWZ AND REVERSAL OF ITC

Haworth India Pvt. Ltd. (AR Order No. Advance Ruling No.26/ARA/2024 Dated: 5th December, 2024)(TN)

The applicant, M/s. Haworth India Private Ltd. had sought Advance Ruling on the following questions:
“1. In the facts and circumstances of the case, whether the transfer of title of goods by the Applicant to its customers or multiple transfers within the FTWZ would result in bonded warehouse transaction covered under Schedule III of the CGST Act, 2017 r/w CGST Amendment Act, 2018?

2. Whether the Integrated Tax (IGST) Circular No. 3/1/2018 dated 25th May, 2018 is applicable to the present factual situation?”

The questions were earlier decided vide AR dated 20th June, 2023 but the ld. AAAR remanded matter back vide appeal order dated 20th December, 2023 and hence this fresh proceeding. In fresh proceeding, following questions are considered:

“1. Whether in the facts and circumstances the activities and transactions would fall under paragraph 8(a) or 8(b) of Schedule III of CGST Act and remain non-taxable?

2. Whether irrespective of the activities and transactions falling under paragraph 8(a) or 8(b) as aforesaid input tax credit would be available without any reversals since no prescription has been notified for purpose of Explanation (ii) below Section 17(3) of CGST Act?”

The applicant is engaged in manufacture and sale of office furniture under the brand name ‘Haworth’. The applicant imports certain finished goods from its group entities. Applicant sales such imported goods.

The applicant contemplated to operate the import and re-sale transactions from a Free Trade Warehousing Zone (hereinafter referred to as ‘FTWZ’) for operational convenience involving less documentation and swift clearance process so as to expedite project execution. Applicant explained the process of such transaction.

The Applicant secures space in the FTWZ for a fee to store the imported goods from a unit holder. The Applicant executes required lease agreement with the FTWZ unit holder and deposits the goods from the port by filing Bill of Entry (BOE). FTWZ, owned and operated by independent third party, merely clears and warehouses the goods imported. The FTWZ collects warehousing charges from the Applicant.

No import duty is paid on clearance from the port.

The Applicant transfers the title of goods to customer under the cover of an invoice. The customer either clears goods from the FTWZ or may make further transfer of such goods to other customers. The goods continue to remain in FTWZ unit holder till the final customer files BOE and clears goods from FTWZ. The applicant reiterated that multiple transfers are made while goods are lying in FTWZ.

The final customer clears the goods from the FTWZ for home consumption and at this juncture, goods are removed from the warehouse and is taken to the premises of the Customer.

The applicant was of opinion that since FTWZ is equivalent to bonded warehouse, transfers within FTWZ before clearance shall fall under Schedule III of the CGST Act, 2017, thereby not attracting levy under GST.

The applicant was of further opinion that in case of goods deposited in a warehouse, only the person who is ultimately clearing the goods for home consumption is liable to tax and the transferor is not liable to tax on such transfer of warehoused goods.

The applicant also placed reliance on the advance rulings pronounced by Tamil Nadu Advance Ruling Authority in the case of The Bank of Nova Scotia – Order No. 23/AAR/2018 dated 31st December, 2018 -2019-VIL-29-AAR and

Sadesa Commercial Offshore De Macau Limited – Order No. 24/AAR/2018 dated 31st December, 2018 – 2019-VIL-28-AAR.

The ld. AAR examined scheme of ‘warehoused’ goods with reference to provision of GST Act.

After scrutiny of various aspects, in respect of question (1), the ld. AAR observed as under:
“7.23 Under these circumstances, we are of the opinion that a ‘Free Trade

Warehousing Zone’, as the name suggests, is a bonded premises providing warehousing facility, much in parity with the bonded warehouse under the Customs Act. Further, when the goods are imported and brought into a FTWZ unit, they are basically warehoused first and then traded or subjected to other authorized operations as the case may be. We notice that the applicant’s queries for advance ruling in the instant case is restricted to the first stage, i.e., when the imported goods are supplied to any person before they are cleared for home consumption, while they still remain warehoused. Accordingly, we are of the considered opinion that the provisions of 8(a) of Schedule III of the CGST Act, 2017, viz., “Supply of warehoused goods to any person before clearance for home consumption” applies to the instant case.”

Regarding question (2), the ld. AAR examined the provision of Section 17(2) and 17(3) which talks about apportionment of credit in such situations when a taxable person effects taxable supplies as well as exempted supplies. After examining the legal position, the ld. AAR observed as under:

“7.28 Under the facts and circumstances of the case, we are of the considered opinion that reversal of proportionate input tax credit of common inputs/input services/Capital goods is not warranted at the hands of the Applicant in terms of the amended Section 17(3) of the CGST Act, 2017 read with Explanation 3 of Rule 43 of the CGST Rules, 2017, even when the activity/transaction in question is covered under paragraph 8(a) of Schedule III of the CGST Act, 2017, as long as it does not relate to supplies from ‘Duty Free Shops’ at arrival terminal in international airports to the incoming passengers.”

Accordingly, the ld. AAR passed the ruling in favour of applicant.

Goods And Services Tax

HIGH COURT

98. M/S. Atulya Minerals Vs. Commissioner Of State & Others

[2025-Tiol-271-Hc-Orissa-Gst]

Dated: 3rd February, 2025

Rule 86A of CGST Rules 2017- Revenue’s right to block the credit expires on completion of one year when appropriate recovery proceeding is initiated.

FACTS

Pursuant to a judgment dated 10th September, 2024, revenue made a fresh order dated 27th September, 2024 invoking Rule 86A of CGST Rules, 2017. Petitioner challenged the said fresh order which justified appropriation of future input tax credit (ITC) when it becomes available to the petitioner and thus do negative blocking of ITC. The fact of the matter is that Rule 86A of Orissa GST Rules, 2017 allows blocking of electronic ledger for a period of one year. Vide the order passed by Hon. High Court, petitioner was directed to satisfy the authority during the blocking period of maximum one year to show that there did not exist a reason to continue to block the credit. According to the petitioner, the fresh order of the revenue was without any basis. Reliance was placed by petitioner on the view taken by division Bench of Telangana High Court [Laxmi Fine Chemical vs. Assistant Commissioner (2024) 18 Centax 134 (Telangana)] which in turn had considered several precedents.

HELD

Hon. High Court noted that Laxmi Fine Chemical (supra) was a view taken by Telangana High Court prior to the view taken in the above cited orders dated 10th September, 2024 and 23rd September, 2024. Further, revenue’s counsel submitted that the investigation report was already submitted and proceedings were to be initiated. Hence Hon. Bench found no necessity of appropriation for negative blocking as revenue’s right is already reserved to initiate recovery proceedings under section 73 or also under section 74, rather than invoking Rule 86A. Hence, impugned order purporting to justify blocking of future credit was without basis. Referring to Laxmi Fine Chemical (supra), it was held that on initiation of appropriate recovery proceedings, the blocking automatically will come to an end after expiry of one year thereby making available to the dealer to debit the electronic ledger for the available input tax credit.

99. M/s. TTK Healthcare Ltd vs. The Assistant State Tax Officer [Kerala]

[2025-TIOL-224-HC-Kerala-GST]

Dated: 29th November, 2024.

In absence of constitution of the Appellate Tribunal, 10 per cent of the disputed demand directed to be paid in order to defer the recovery and invocation of the bank guarantee; with a condition that the Appeal is filed within one month of Tribunal’s constitution.

FACTS

The petitioner challenged the order under section 129 of the GST law which was upheld by the First Appellate Authority. In absence of non-constitution of the Appellate Tribunal, a second appeal under section 112 of the law cannot be filed. On an apprehension that the bank guarantee furnished for the release of goods will be invoked, the present writ is filed.

HELD

The Court disposed of the writ petition by directing that if 10 per cent of the disputed amount is remitted, any further recovery or invocation of the bank guarantee will be deferred until a final decision is made by the Tribunal. However, the Appeal should be filed within one month of its constitution.

100. Rohan Dyes and Intermediates Ltd vs. Union of India and Ors [Gujarat]

[2025-TIOL-225-HC-AHM-GST]

Dated: 8th January, 2025.

In absence of an opportunity of personal hearing and insufficient verification of data, the order was remanded to the authorities for proper verification of data and provision of a fair hearing.

FACTS

The petitioner was unable to upload Form GST TRAN-1 to claim transitional credit and sought permission from the Court to file the form. After several legal proceedings and the issuance of a circular by CBIC, the Form GST TRAN-1 was filed in October 2022. The Assistant Commissioner questioned the claim and asked for further documentation. After submission of documentation, part of the claim was rejected, citing discrepancies based on the Service Tax Returns for June 2017.

HELD

The High Court noted that there was violation of principles of natural justice as the order was passed without providing an opportunity of being heard and the department failed to provide a reasoned order. Further the order was based on insufficient verification of data. Accordingly, the matter is remanded with a direction of giving a fair hearing and after verification of provisions of law.

101. Kamala Stores and Anr vs. The State of West Bengal and Ors [Calcutta]

[2025-TIOL-277-HC-KOL-GST]

Dated: 6th February, 2025

Considering the bona fides of the petitioner, the delay in filing the appeal was condoned and the Appellate Authority directed to dispose of the case on merits.

FACTS

Petitioner’s appeal was rejected on the ground that the same is barred by limitation. It was stated that without appropriately taking note of the grounds for condonation of delay, the appeal got rejected on the ground that the authority is competent only to condone the delay provided the appeal is filed within the period of one month beyond the time prescribed.

HELD

Petitioner had made the pre-deposit before filing the appeal. There appears to be a delay of 79 days in filing the appeal. Taking into consideration that they are a small partnership firm and there is no lack of bona fide and one does not stand to gain by filing a belated appeal, the Court directed the appellate authority to hear and dispose of the appeal, on merit, upon giving an opportunity of hearing, within a period of eight weeks.

102. BMW India Pvt. Ltd. vs. Appellate Authority for Advance Ruling for the State of Haryana

(2024) 24 Centax 382 (P&H.)

Dated: 12th November, 2024

ITC on demo vehicles used for promotional purpose shall be eligible even if such vehicles are capitalized in the books of accounts and itself are not sold separately.

FACTS

Petitioner was engaged in business of sale of motor vehicles. It was desirous of knowing the eligibility of ITC in respect of demo vehicles used for promotion and approached Authority of Advance Ruling (AAR) for the same. AAR responded in the negative. On further appeal, Appellate Authority of Advance Ruling (AAAR) (respondent) confirmed that such ITC on demo vehicle is not eligible. Aggrieved, by such an order petitioner filed a writ petition before the Hon’ble High Court.

HELD

The Hon’ble High Court relied upon Circular No. 231/25/2024-GST (F. No. CBIC-20001/6/2024-GST) dated 10th September, 2024, which clarified that ITC is admissible on demo vehicles used in the course or furtherance of business. Accordingly, impugned order was quashed and writ petition was disposed of in favour of petitioner.

103. Kshitij Ghildiyal vs. Director General of GST Intelligence, Delhi

(2024) 25 Centax 267 (Del.)

Dated: 16th December, 2024

Arrest made without communicating the grounds in writing to petitioner is illegal and violative of legal procedure and principle of natural justice.

FACTS

Petitioner was a director of a company engaged in e-waste management. A search was conducted at the company’s premises under section 67 of the CGST Act, 2017 and petitioner was taken under judicial custody at respondent’s office on 28th November, 2024 for two days. Petitioner was subsequently arrested on 30th November, 2024 alleging availing fraudulent ITC based on fake invoices without furnishing the grounds of arrest in writing. He was produced before the Chief Judicial Magistrate on 30th November 2024, who remanded him to judicial custody for 13 days. Aggrieved by illegal detention and procedural violations of law, petitioner filed an application before the Hon’ble High Court.

HELD

Hon’ble High Court ruled that failure to provide written grounds of arrest clearly violated Article 22(1) of the Constitution of India and section 69(2) of the CGST Act. The Court relied upon the Supreme Court judgment in the case of Pankaj Bansal vs. Union of India [(2023) 155 taxmann.com 39 (SC)] where it was reaffirmed that written communication of grounds of arrest is mandatory and fundamental. The Court further observed that respondent had committed various other procedure defaults such as irregularities in the issuance of summons, including backdated signatures, delayed DIN generation and illegally detaining for two days at the respondent’s office. Citing all the above stated reasons, the Court declared the petitioner’s arrest illegal and set aside the remand order.

104. Proxima Steel Forge Pvt. Ltd. vs. Union of India

(2024) 24 Centax 294 (P&H.)

Dated 3rd October, 2024.

Subordinate Authority cannot refuse to comply with and question the basis of directions of Appellate Authority.

FACTS

The petitioner filed a refund application of ₹2,02,09,111/-. However, the respondent rejected the claim, citing it as time-barred under Circular No. 157/13/2021-GST [F. NO. CBIC-20006/10/2021], dated 20th July, 2021. The petitioner filed an appeal against such rejection of application. Appellate Authority directed respondent for reconsidering the application on merits. Despite such clear directions of considering the refund application on merits respondent once again rejected the refund application ignoring the direction of Appellate Authority. Aggrieved by such order, petitioner filed an application before Hon’ble High Court.

HELD

Hon’ble High Court held that order passed by respondent dismissing petitioner’s refund application as time barred in spite of clear instructions given by appellate authority for deciding the application on merits, is bad in law. The Court further stated that such actions reflect a failure in the hierarchical structure of GST system which could lead to administrative chaos and evade public trust in appeal process. The Court also emphasized that subordinate officers must comply with appellate decisions to maintain the integrity of the system and prevent unnecessary litigation. The impugned order passed by respondent dated 24th January, 2024 was set aside directing Appellate Authority to appoint another officer to reassess and decide petitioner’s refund application purely on its merits within a stipulated period of two months.

105. Ali K. vs. Additional Director General, DGGI, Kochi

(2024) 24 Centax 283 (Ker.)

Dated: 9th August, 2024

Provisional attachment ought to be automatically vacated and cannot be extended beyond one year by issuing fresh order.

FACTS

The petitioner was a partner of a firm engaged in the business of scrap. A search was conducted at their business premises in November 2020 which resulted in cancellation of the firm’s GST registration. Subsequently, a SCN was issued in 2023 demanding GST alleging that petitioners had availed ITC based on fake invoices. During the pendency of proceedings, the respondent issued an order attaching bank accounts of petitioner and the firm. The petitioners requested the respondent for lifting attachment on conclusion of one year period as per Section 83 of the CGST Act, 2017. However, to safeguard revenue interests, the respondent issued a fresh attachment order on petitioner’s properties. Aggrieved by this action, the petitioners filed a writ petition before the Hon’ble High Court.

HELD

Hon’ble High Court held that courts cannot deviate from the plain meaning of statutory provisions even in the public interest. It was observed that section 83 of the CGST Act, 2017 explicitly limits the period of provisional attachment to one year from the date of initial order. High Court cited Radha Krishan Industries vs. State of Himachal Pradesh — 2021 (48) G.S.T.L. 113 (S.C.) where Supreme Court held that the time-period of provisional attachment under section 83 read with Rule 159 of CGST Rules, 2017 must be strictly interpreted as the same does not permit issue of a fresh attachment order after expiry of maximum period of one year. Accordingly, the Court dismissed the writ petition in favour of petitioner.

106. Sali P. Mathai. Ltd vs. State Tax Officer, State GST Department, Idukki

(2024) 24 Centax 316 (Ker.)

Dated 29th October, 2024

Limitation period of two years does not apply to fresh refund application after rectifying deficiencies when original refund application which was filed in time.

FACTS

Petitioner filed an application for a refund on 5th April, 2021 under section 54 of the CGST Act 2017. Respondent, upon reviewing the application, issued a deficiency memo on 19th April, 2021 highlighting certain discrepancies. In response, petitioner submitted a fresh refund application on 30th September, 2021. However, respondent rejected fresh application stating that two years had already passed and the same was time barred. Aggrieved, petitioner approached the Hon’ble High Court.

HELD

Hon’ble High Court held that Rule 90(3) of the CGST Rules requires a fresh refund application to be filed after rectifying deficiencies, but does not mandate that the period of limitation of two years under section 54(1) of the CGST Act, 2017 should apply to a fresh refund application. Once the original application was filed in time, limitation period cannot apply for subsequent application made after rectification of deficiency. Accordingly, the Court ordered respondent to take cognizance of documents submitted and process the refund application in accordance with the law.

107. A.N. Enterprises vs. Additional Commissioner

(2024) 24 Centax 347 (All.)

Dated: 19th September, 2024.

Goods cannot be detained or seized invoking section 129 of CGST Act merely on the basis of undervaluation of goods unless there is clear evidence of tax evasion, fraud, or misdeclaration.

FACTS

Petitioner was engaged in the business of scrap. It had sold aluminium cables in the normal course of business accompanied by all relevant documents. During transit, the goods were intercepted, and upon physical verification, respondent asserted that the consignment contained PVC Aluminium Mixed Cable (Feeder Cable) instead of aluminium cable. Respondent seized the consignment and initiated proceedings under section 129 of the CGST Act citing undervaluation of goods and made petitioner pay deposit towards penalty without issuing any SCN. On appeal by the petitioner, it was pointed out that Commissioner Commercial Tax had issued a circular on 9th May, 2018 that goods could not be detained on the ground of undervaluation. However, appellate authority supported the order of Additional Commissioner. Petitioner therefore challenged detention order of the respondent based on the ground of undervaluation and for the reason of difference in HSN before Hon’ble High Court.

HELD

Hon’ble High Court observed that almost similar goods were accompanied by all requisite documents and that there was no discrepancy in the HSN Code, quantity or tax rate. The Court emphasized that, as per the Commissioner’s Circular No. 229/1819009 dated 9th May, 2018, goods cannot be detained merely on the grounds of undervaluation. Accordingly, the writ petition was allowed, and the authorities were directed to refund any amount deposited by petitioner.

108. BLA Infrastructure (P.) Ltd. vs. State of Jharkhand

[2025] 171 taxmann.com 187 (Jharkhand)

Dated: 30th January, 2025

When an appeal filed against the order is allowed in favour of the Appellant, a right to receive the 10 per cent pre-deposit is vested in the name of the appellant and the same cannot be retained by the statutory authority citing a limitation period of 2 years under section 54 of the CGST Act which appears to be directory in nature and also is in conflict with Article 137 of the Limitation Act.

FACTS

The petitioner received a Show cause notice alleging the mismatch in GSTR-1 and GSTR-3B, followed by an ex-parte order confirming the demand. Aggrieved by the same, the petitioner preferred an appeal after making a statutory pre-deposit of 10 per cent of the disputed tax amount in terms of Section 107(6)(b) of the Act. After hearing the petitioner and scrutinizing the documents, the appeal was allowed in favour of the petitioner and Form GST APL-04 was issued. The petitioner made an application for a refund of the pre-deposit amount, which was held deficient being beyond the period prescribed under section 54(1) of the Goods & Services Tax Act and hence, aggrieved thereof, the petitioner filed the petition.

HELD

The Hon’ble Court held that there is no dispute to the effect that once a refund is by way of statutory exercise, the same cannot be retained by the State, or the Centre, especially by taking aid of a provision which on the face of it is directory. The language stated in Section 54 is “may make an application before the expiry of 2 years from the relevant date”. The Court also referred to Article 137 of the Limitation Act, 1963, which provides for a 3-year limitation period for filing a Money Suit. Referring to decisions of the Hon’ble Supreme Court using the use of the word ‘may’ and the decision of Hon’ble Madras High Court in the case of Lenovo (India) Pvt. Ltd. vs. Joint Commr. Of Gst (Appeals-1), Chennai 2023 (79) G.S.T.L. 299 (Mad.), as also, taking into consideration that the refund of statutory pre-deposit is a right vested on an assessee after an appeal is allowed in its favour, the Hon’ble Court further held that when the Constitution of India restricts levy of any tax without the authority of law, the retention of the same on the ground of statutory restriction, which is in conflict with the Limitation Act, appears to be being misread by the authorities of the GST Department.

109. Brand Protection Services (P.) Ltd vs. State of Bihar

[2025] 171 taxmann.com 318 (Patna)

Dated: 4th February, 2025.

For filing an appeal, the date of receipt of the order is to be excluded while counting the period of limitation. Also, the period mentioned in section 107(1) cannot be interpreted as 90 days and 30 days for section 107(4) of the CGST Act.

FACTS

The petitioner received a final demand order under section 73(9) on 27th December, 2023, along with a summary order in Form DRC-07. The petitioner filed an appeal in Form GST APL-01 under section 107 after a statutory period of 3 months but within the condonable period of one month on 26th April, 2024, claiming that the delay was due to ill health of the director. Revenue rejected the appeal at the admission stage on the grounds that it was filed beyond the limitation period of three months plus a condonable period of one month (interpreted as 120 days). Petitioner contended that the appellate authority erred in interpreting the limitation period as 120 days instead of four calendar months.

HELD

The Hon’ble Court held that the period of three months mentioned in section 107(1) and a period of one month under section 107(4) cannot be interpreted as a period of 90 days and 30 days respectively. By virtue of section 9 of the General Clauses Act, the date i.e. 27th December, 2023 on which the appellate order was received by the petitioner is liable to be excluded in counting the prescribed period of limitation. The Hon’ble Court referred to a method of computation of a ‘month’ as per Halsbury’s Laws of England, 4th Edn., para 2116, that when the period prescribed is a calendar month running from any arbitrary date the period expires upon the day in the succeeding month corresponding to the date upon which the period starts, save that if the period starts at the end of a calendar month which contains more days than the next succeeding month, the period expires at the end of that succeeding month. The Court also referred to various judicial precedents on the subject matter to conclude that in the present case, three-month periods from the date of receipt of the order of adjudicating authority i.e. 27th December, 2023 expired on 27th December, 2024 and since the appeal was preferred on 26th April, 2024, appellate authority was required to consider cause shown by petitioner to condone delay as petitioner could have preferred an appeal within a further period of one month i.e. 27th April, 2024. The Hon’ble Court thus held that the appeal was preferred within one month after the expiry of the prescribed period of limitation of three months and hence order rejecting the appeal is liable to be set aside.

110. (Andhra Pradesh) Habrik Infra vs. Assistant Commissioner (ST)

[2025] 171 taxmann.com 67

Dated 22nd January, 2025

Order without DIN number or signature is non-est and Invalid.

FACTS

The petitioner was served with an assessment order in Form GST DRC-07. He challenged the said order on various grounds, including that the said order did not contain the signature of the assessing officer and the DIN number. The petitioner relied upon the circular, dated 23rd December, 2019, bearing No.128/47/2019-GST, issued by the C.B.I.C., to submit that the non-mention of a DIN number would mitigate against the validity of such proceedings. He also pointed out that, the question of the effect of non-inclusion of DIN number on proceedings, under the G.S.T. Act, came to be considered by the Hon’ble Supreme Court in the case of Pradeep Goyal vs. Union of India & Ors 2022 (63) G.S.T.L. 286 (SC) in which, after noticing the provisions of the Act and the circular issued by the Central Board of Indirect Taxes and Customs (herein referred to as “C.B.I.C.”), the Hon’ble Supreme Court held that an order, which does not contain a DIN number would be non-est and invalid.

HELD

The Hon’ble Court held that, in view of the aforesaid judgments and the circular issued by the C.B.I.C., the non-mentioning of a DIN number and absence of the signature of the assessing officer in the impugned assessment order, would be liable to be set aside.

111. Addichem Speciality LLP vs. Special Commissioner I, Department of Trade and Taxes

[2025] 171 taxmann.com 315 (Delhi)

Dated: 7th February, 2025.

There is no authority in law to condone the delay in respect of appeals filed beyond the prescribed period of limitation provided by sections 107 (1) and 107 (4) of the CGST Act.

FACTS

The petitioners (in a batch of writ petitions) are registered proprietors / dealers under the CGST Act, each holding different registration number. They were assessed by the respective adjudicating authorities which resulted in certain demands being raised against them and in some instances, their GST registrations also were cancelled. Aggrieved by the cancellation of their GST registrations and the demands imposed, the petitioners filed statutory appeals before the Appellate Authority under section 107 of the CGST. However, those appeals were not entertained and were dismissed due to delay in filing.

HELD

The Hon’ble Court held that it is well settled that once a statute prescribes a specific period of limitation, the Appellate Authority does not inherently hold any power to condone the delay in filing the appeal by invoking the provisions of sections 5 or 29 of the Limitation Act, 1963. The Hon’ble Court relied upon the decision of Apex court in the case of Singh Enterprises vs. Commissioner of Central Excise, Jamshedpur & Ors. [(2008) 3 SCC 70 = 2008 (221) E.L.T. 163 (S.C.)], Commissioner of Customs and Central Excise vs. Hongo (2009) 5 SCC 791 and Garg Enterprises vs. State of UP 2024 (84) G.S.T.L. 78 (All.) in support of the said proposition. It further held that the Supreme Court has observed that the plenary powers of the High Court cannot, in any case, exceed the jurisdictional powers under Article 142 of the Constitution of India 1950, and even the Supreme Court cannot extend the period of limitation de hors the provisions contained in any statutory enactment. The Court further held that the power to condone delay caused in pursuing a statutory remedy would always be dependent upon the statutory provision that governs. The right to seek condonation of delay and invoke the discretionary power inhering in an appellate authority would depend upon whether the statute creates a special and independent regime with respect to limitation or leaves an avenue open for the appellant to invoke the general provisions of the Limitation Act to seek condonation of delay. The facility to seek condonation can be resorted provided the legislation does not construct an independent regime with respect to an appeal being preferred. Once it is found that the legislation incorporates a provision that creates a special period of limitation and proscribes the same being entertained after a terminal date, the general provisions of the Limitation Act would cease to apply.

Construction Input Tax Credits

Two recent decisions of the Supreme Court at the close of 2024 have set the direction over the interpretation of “construction credits” which were at the helm of constant controversy under the GST law. While the first decision was rendered in the case of Chief Commissioner of Central Goods and Service Tax vs. Safari Retreats (P) Limited1 (Safari Retreat case) with respect to input tax credit availability to shopping malls, etc., the second decision namely Bharti Airtel Ltd. vs. Commissioner of Central Excise, Pune2 (Bharti Airtel case) was rendered in the context of availability of credit of Telecommunication towers to cellular companies under the Cenvat Credit scheme. The said matter was quickly adopted by the Delhi Court in the case of Bharti Airtel Ltd. vs. Commissioner, CGST Appeals-1, Delhi3 in the context the GST provisions. The GST Council quickly sprung into action by reversing the decision of Safari Retreat case and reaffirming its original intent to exclude land, building and civil structures from the scope of input tax credit. In this article, we would briefly summarise the principles emerging from these decisions and their application to the provisions of section 17(5)(c) and 17(5)(d) of GST law (colloquially be termed as ‘out-sourced / sub-contracted construction’ and ‘in-house construction’ respectively).

1  [2024] 167 taxmann.com 73 (SC)

2  [2024] 168 taxmann.com 489 (SC)

3  [2024] 169 taxmann.com 390 (Delhi)

CONTEXT OF THE ISSUE — BLOCK CREDIT

Extract of section 17(5)(c) and (d) is as under:

“17(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:- ……..

(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business…………

Explanation –– For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

Explanation –– For the purposes of this Chapter and Chapter VI, the expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes-

(i) land, building or any other civil structures;

(ii) telecommunication towers; and

(iii) pipelines laid outside the factory premises.”

A simple reading of the above extract suggests that all goods or services used for construction of an immovable property (except plant and machinery) are barred from input tax credit except when such activity is performed for onward supply of work contract / construction services. Similar provisions existed under the extant CENVAT credit rules and the respective State VAT laws. Despite modern laws being conceptualised on ‘value added tax’ principles, successive administrations have treated construction of immovable capital assets (specifically buildings) as ineligible for input tax credit based on the philosophy that capex buildings did not contribute to the value-addition of the end-product / service. This blockage also provided an attractive opportunity to Government(s) to realise substantial revenues on such construction activity.

The advent of the GST scheme shifted the focus to taxing all business activities and consequently transforming input tax credit from a narrow ‘one-to-one eligibility’ into a wider ‘business level eligibility’. Despite this wider stance, blocking of construction continued in a more regressive form having a larger impact on construction activity, re-emphasising the Government’s resolve to garner tax revenues from this blockage.

Construction intensive industries such as commercial complexes, warehousing/ logistic structures, hospitality buildings, etc., faced significant cost overruns on account of the above provisions. Though these business verticals were rendering output taxable services, substantial financial capital got sucked into GST credit blockage. There was also an onerous burden on such operators to establish that an item was ‘movable’ or ‘plant and machinery’ in order to stake a claim of input tax credit. Being a new law, these terms were being interpreted by field formations (including Advance ruling authorities) based on their personal bias rather than business application. This lead to the pioneer case of Safari Retreat case4, in which the Orissa High Court read down the provisions of section 17(5)(d) for shopping malls, commercial complexes, etc., and granted input tax credit to all construction activity when such complexes were directly used for onward taxable output activity. Sensing a huge revenue loss, the Government jumped into action by agitating its stand before the Supreme Court which ultimately culminated into the now famous Safari retreat case.

4 [2019] 105 taxmann.com 324 (Orissa)

BRIEF OF THE SAFARI RETREAT CASE

The key issue before the Supreme Court was the interpretation of section 17(5)(d) of the CGST Act. While the issue was limited to section 17(5)(d), reference and interpretation was being made to section 17(5)(c) to appreciate the true scope of both clauses. The key propositions/ arguments before the Court were:

Issue 1 – Constitutional challenge to the provisions of section 17(5)(d) on the premise that it violated Article 14 as it discriminated taxpayers onward selling the commercial structures with those leasing the very same structures despite both being liable to tax on their respective outward supply;

Issue 2 – Scope of ‘plant and machinery’ u/s 17(5)(c) and ‘plant or machinery’ u/s 17(5)(d) are different as the term ‘or’ in section 17(5)(d) is a conscious legislative usage de-linking the phrase from the defined term in the Explanation. Therefore, buildings, civil structures, telecommunication towers, etc which were specifically excluded from the definition of ‘plant and machinery’ u/s 17(5)(c) could still be considered as plant in its generic usage u/s 17(5)(d) based on its functionality;

Issue 3 – Condition placed by the phrase ‘on own account’ under section 17(5)(d) excludes suppliers of constructed apartments for sale as well as for lease/ licence. Hence credit was blocked only to cases where the construction was for self-usage and not for onward commercial exploitation.

The Hon’ble Supreme Court examined the legislative setting behind introduction of GST and the inter-play between the provisions of section 17(5)(c)/ (d). In so far as the constitution challenge is concerned, the provisions were clearly held to be valid and within legislative domain, putting to rest questions over the Council’s discretion in denying input tax credit even though the building contributed to generating taxable supplies. While addressing the question of law on the phrase ‘plant or machinery’ u/s 17(5)(d) in contrast to the phrase ‘plant and machinery’ adopted in 17(5)(c), the Court observed that the difference in ‘and’ and ‘or’ is not a legislative error but a conscious choice. Hence, the definition of ‘plant and machinery’ which specifically excluded land, buildings, civil structures would not apply to the phrase ‘plant or machinery’. ‘Plant’ or ‘machinery’ would be understood in generic terms and not by the definition of ‘Plant and machinery’. The Court borrowed the functionality test from the Income tax law5 to hold that if a building was used as a ‘technical structure’ rather than merely a ‘setting’ in which trade is carried on, such building would constitute a plant despite the specific exclusion of buildings in the explanation. It was observed that a plant is an apparatus used by a businessman for carrying on its business and does not include his stock in trade; it include all goods and property, whether movable or immovable, as long as it function as an apparatus in his trade. Since generating station building, hospital, dry dock and ponds were considered as apparatus based on the business functions, a building or a warehouse could also be considered as ‘plant’ within the meaning of Section 17(5)(d) if it served as an essential tool of trade with which business is carried on. However, if it merely serves as a setting or mere occupation, it will not qualify as a ‘plant’. On the third aspect, the court held that section 17(5)(d) blocked credit when the immovable property is used for ‘own account’. Where the construction of immovable property was for ‘other’s account’ and generating revenues which are in the nature specified in clause (2) or (5) of Schedule II, such structure would be eligible for input tax credit. The phrase ‘own account’ covered within its ambit only those cases where the building was for own residential or commercial occupation and not for cases where the building was for onward lease/ license. Accordingly in cases where any building was under construction with intent of generating leasing/ licensing revenue, credit was permissible u/s 17(5)(d) since the building was not constructed for ‘own account’ but for ‘other’s account’.

5 Commissioner of Income-tax vs. Taj Mahal Hotel [1971] 82 ITR 44 (SC); 
Commissioner of Income-tax vs. Anand Theatres [2000] 110 Taxman 338 (SC); 
Commissioner of Income-tax vs. Karnataka Power Corpn. [2000] 112 
Taxman 629 (SC)

RETROSPECTIVE AMENDMENT TO SECTION 17(5)(D)

The Finance Bill 2025 has now introduced an amendment attempting to overturn and rectify the acclaimed error in using the phrase ‘plant or machinery’ in section 17(5)(d) instead of ‘plant and machinery’. The said retrospective amendment (w.e.f. 1st July, 2017) effectively overcomes the decision of the Safari retreat case on the proposition that the term ‘plant or machinery’ is distinct from the term ‘plant and machinery’. Among the two exceptions which were cited by the Supreme Court, the first exception of differentiating ‘plant and machinery’ from ‘plant or machinery’ seems to have now been nullified. While thoughts are developing over challenging this retrospective amendment on the ground of denying vested credit6, probability of achieving a positive result seems to be bleak in view of the review petition filed by the Revenue. The Revenue still acclaims in its review that the use of the term ‘or’ was drafting error and not a legislative choice. De hors the review petition it would be suitable to treat both the clauses at par and apply the specific definition of ‘plant and machinery’ to all its cases.

6 Commissioner of Income-tax vs. Vatika Township (P.) Ltd. [2009] 
178 Taxman 322 (SC) & Tata Motors Ltd. v. State of Maharashtra and Others
 [(2004)5 SCC 783

ANALYSING ‘PLANT AND MACHINERY’

With retrospective amendment proposed w.e.f. 1st July, 2017 term ‘plant and machinery’ is applicable to both in-house construction and sub-contracted construction. The term has an inclusive portion to include apparatus, equipment and machinery and their structural or foundational support but specifically excludes land, building or other civil structures, telecommunication towers and pipelines outside the factory. Under the said definition, generic meanings of apparatus, equipment and machinery would continue to have prominence. The functionality test would still be applied to the fixtures, installations, etc., housed in the civil structures and makes them amenable to be termed as ‘plant and machinery’. What has been now overturned by the retrospective amendment to section 17(5)(d) is that the functionality test which could have been hitherto applied to land/ buildings, civil structures, to shift treat ‘buildings/ civil structures’ as ‘apparatus / equipment’ for a particular business function, is now not available. In view of the specific exclusion to the phrase ‘plant and machinery’, any building / civil structure in whatever form/usage could be excluded from the term plant and machinery. This position which was restrictive only to section 17(5)(c) (i.e. works contract inputs) is not extendable also to section 17(5)(d) (i.e. all goods and services where construction is on own account).

TECHNICALITIES ON THE PHRASE “OWN ACCOUNT”

The other exception to the applicability of the block credit was cases where the construction was ‘not for own account’ but ‘other’s account’. The phrase ‘own account’ has not been dealt with in much detail by the Supreme Court except for the conclusion that construction for onward sale/ lease/ license etc., to third party occupants does not amount ‘construction on own account’. The Court bestowed parity to entry 2 and entry 5(b) of Schedule II by quoting that where under-construction buildings are intended for sale credit is available. Similarly, under-constructed buildings intended for onward lease would also be a construction for ‘other’s account’. An interesting concept of under-construction lease is now evolving based on this observation of the Court.

While a ‘build-to-suit’ model is a classic case to fit into this proposition, many a times the commercial reality is fairly more complex. There may be a change in use of a structure either during construction or after issuance of the occupancy certificate. A strict reading of the clause suggests that only if the intent of lease is established during construction then the credit would be eligible. Where the intent of lease is not established up to occupancy certificate, such credit could be disputable on the sheer ground that construction in such cases would be for own account and not for lease. This is still an emerging area of study and will be engaged by revenue authorities if one argues the point of the construction being for other’s account.

BRIEF OF THE BHARTI AIRTEL CASE(S)

Moving onto the other case of the Supreme Court w.r.t the eligibility of Cenvat Credit of Base Transmission Stations (BTS), Telecommunication Towers, Antennas, Pre-fabricated Shelters (PFBs) etc., based on the argument of whether they are goods a.k.a. movable property. The Court examined the meaning of the phrase ‘immovable property’ under the General Clauses Act 1897 and the Transfer of Property Act, 1882 which include land, benefits arising out of land and things permanently attached or fastened to earth for the beneficial enjoyment of the building or land. In this context, the Court re-affirmed the long-standing principles extracted from series of decisions of the Supreme Court under Central Excise to assess whether a thing was immovable in nature, namely:

  •  Nature of annexation: This test ascertains how firmly a property is attached to the earth. If the property is so attached that it cannot be removed or relocated without causing damage to it, it is an indication that it is immovable.
  •  Object of annexation: If the attachment is for the permanent beneficial enjoyment of the land, the property is to be classified as immovable. Conversely, if the attachment is merely to facilitate the use of the item itself, it is to be treated as movable, even if the attachment is to an immovable property.
  •  Intendment of the parties: The intention behind the attachment, whether express or implied, can be determinative of the nature of the property. If the parties intend that the property in issue is for permanent addition to the immovable property, it will be treated as immovable. If the attachment is not meant to be permanent, it indicates that it is movable.
  •  Functionality Test: If the article is fixed to the ground to enhance the operational efficacy of the article and for making it stable and wobble free, it is an indication that such fixation is for the benefit of the article, such the property is movable.
  •  Permanency Test: If the property can be dismantled and relocated without any damage, the attachment cannot be said to be permanent but temporary and it can be considered to be
    movable.
  •  Marketability Test: If the property, even if attached to the earth or to an immovable property, can be removed and sold in the market, it can be said to be movable.

Applying these tests to the telecommunication towers it was held that the towers were movable in nature and hence goods for the purpose of availment of CENVAT Credit. This rationale was adopted by the Delhi High Court in Bharti Airtel Ltd’s case once again to hold that telecommunication towers are movable in nature and hence the question of applying the definition of plant and machinery as applicable to section 17(5)(d) is irrelevant. The entire BTS/BSS, PFBs, etc. though being attached to earth/building are not for the purpose of beneficial enjoyment of the land/building to which they are attached but for technical reasons and efficient operations. Interestingly, the decision has treated the phrases ‘plant or machinery’ and ‘plant and machinery’ at equivalence and yet rendered that the explicit mention of telecommunication towers under the phrase ‘immovable property’ would not render the telecommunication towers as blocked items for input tax credit. This decision would hold the fort despite the retrospective amendment to the provisions of section 17(5)(d) and go a long way in deciding whether items are movable/ immovable in nature under the GST context. The innumerable advance rulings which have held that air conditioners, lift / elevator installations, electrical/ plumbing fixtures, fire extinguishers, etc., form part of the immovable property would need to be re-visited based on the above tests. In all likelihood the said items would fall outside the scope of immovable property based on the tests carved from the General Clauses Act & the Transfer of Property Act.

COMBINED INTERPRETATIVE DESIGN

Now both these decisions lead to a particular sequence of analysis to be factored before reaching a conclusion on block credits:

The above sequence suggests that entire blocked credit is founded upon the fundamental point of whether the goods or services in question are used for construction of an ‘immovable property’. If this primary test fails, there is absolutely no requirement even to examine the remaining contents of the said provisions. But where one doubts the outcome of this primary test to a particular building/ civil structure, it becomes essential to move to a secondary test of examining whether the same is plant and machinery. Land, buildings and other civil structures may still face the brunt of input tax credit blockage even if they are functionally operating as a ‘apparatus, equipment or machinery’. Interestingly, cases which are prima-facie blocked on account of it being considered as immovable property (other than plant and machinery) u/s 17(5)(d) (i.e. in-house construction) may still be granted input tax credit if they fall under a tertiary test of being construction for ‘onward leasing’ or ‘sale’.

INDUSTRY-WISE APPLICATION OF THE ABOVE SCHEMA

Commercial / Shopping Complexes – The Supreme Court had remanded the matter back to the Orrisa High Court to apply the functionality test in deciding whether such commercial constructions fall within the mischief of section 17(5)(d) (notably cases which covered u/s 17(5)(c) are not within the High Court’s purview and hence must be independently examined). Civil Structure portion of in-house constructions of commercial complexes would now be excludible from the phrase ‘plant and machinery’ (as retrospectively amended) as they fall under the blocked component. The HVAC, electrical / plumbing installations, fire equipment, movable fixtures, hoardings, digital displays, elevators, MLC parking structure, etc., may not be immovable. Even if they are said to be immovable they could be termed as technical equipment, apparatus, machinery and hence fall within the term ‘plant and machinery’ and this component of the construction costs would become eligible for input tax credit. The exclusion in the explanation to plant and machinery would have to be examined restrictively as being only w.r.t. to the ‘land, building, civil structure’ and not with reference to the installations/ fitments housed in such buildings.

Warehouse / Logistic Chains – A typical warehousing contains civil structures, prefabricated shelters, overhead sheets, etc. Certain items (such as foundation, concrete platforms, etc.) would qualify as civil structures and become ineligible for input tax credit. There are also components affixed to said civil structure which are dismantlable and capable of being re-assembled at alternate locations (such as pre-fabricated iron and steel girders, trusses and other structural components which are affixed with nut and bolt system to the civil foundation). One may claim that these are movable in nature based on the nature of annexation test specified above. But on a deeper analysis the object of affixation is for creating a permanent warehousing shed with these items and such affixation results in beneficial enjoyment of the immovable property itself. Moreover, the intent of establishment of the overall outer structure is to function as shelter for storage and would be excluded even if one forcefully argues them as being ‘equipment/ apparatus or machinery’. Therefore, such warehousing structures would form part of immovable property itself and may not be eligible for input tax credit. However, if the case falls under section 17(5)(d) (i.e. in-house construction) and the owner constructs these structures for onward leasing rather than own occupation/ storage, the Safari retreat’s case grants an opportunity to avail input tax credit on the argument of the structure being construction for other purposes and not on own account.

Hotels / Theatres / Convention Centres – The Supreme Court in the Safari retreat case has in its wisdom placed a blanket bar on treating such civil structures as plant u/s 17(5)(d). Be that as it may, the decision in Anand Theatres does not overrule the decision of Taj Hotels in so far as treating sanitary / electrical fittings, installations, fixtures affixed to such premises as being in nature of ‘plant’. Seating arrangements in theatres, sound-proofing panelling, air-conditioning systems, digital screens/ projectors, iron and steel fixtures which are affixed to the immovable property for functional utility need to be tested based on object and mode of affixation. The guiding principle would be to examine whether they are part of the civil structure for better occupation or for technical utility. On both counts of movability and functionality (under the explanation to plant and machinery), many of the above items can be treated as eligible for input tax credit. To reiterate, if the entire premises has been self-constructed with binding intent of onward leasing / licensing or sale, then the construction could termed as being for ‘other’s account’, thus granting a window to argue that the clause itself is not applicable. Challenge arises where certain hotels are leased out under an operator model to large hotel chains (such as Raddisson, etc.). Hotels have a complex formular for payment of fee based on the revenue collections/ occupancy and deduction of certain premises related expenditure. Since models do not fall under the traditional lease model, it would be an uphill task for one to claim that the construction is for ‘others account’.

Port Infrastructure – Port Corporations have developed substantial civil structures in the form of jetty, dock yards, terminals, breakwater walls, etc., which have technical functionality in its field of business. These items being civil in nature could be treated as apparatus / tool to function as port. But the critical counter argument of the revenue is that these are ‘other civil structures’ in the nature of land, building, etc., and hence not eligible. The company in which the phrase ‘civil structure’ is used gives an opportunity to argue that only those items which are immovable and meant for ‘occupancy’ like a building are to be treated as civil structure. The case of the Municipal Corporation of Greater Mumbai vs. Indian Oil Corporation7on storage tanks being termed as things attached to land despite being a technical structure would guide the revenue to pursue that these are in nature of civil structures and hence not eligible for input tax credit to the Port Corporation.

7 1991 SCC (SUPP) 2 18

Factory Constructions – Pre-fabricated structures constituting the walls and sheds of factory structures are part of the overall plant/ machinery. There does not seem to be any doubt on the internal concrete foundations, etc. which are necessary foundational/structural support to the machinery. The external walls / partitions and administrative buildings have been targeted as being ineligible for credit. Strictly speaking, the definition of plant and machinery specifically excludes buildings, civil structures. Though the issue could stand at rest here and credit may be denied, the perspective of these structural being movable needs to be tested. Re-iterating the discussion in the context of warehouses, there is certainly a case for the department to deny stating that the intent of fixation is for permanent enjoyment / occupation of the land and hence constitutes an immovable property.

Co-working spaces / Shared spaces – Internal Fixtures in bare shell civil structures to convert them to co-working space is a common phenomenon. Many of the fixtures are modular in nature and fitted with nuts and bolts (such as cabins, desks, partitions, cupboards, etc.) for enhancement of the workspace. While there are other fixtures which are affixed to the immovable property as a permanent feature. One would have to run a filter of these test and test the movable character of each of the items. The rest which are considered as immovable property and part of the building itself, can be denied even if they are said to be functionally essential for creation of a co-working space.

Residential PG accommodation – Apart from other issues, the unique issue with such accommodation is that the revenue stream is not in the form of a lease rental but akin to hotel models where it is for monthly or short-term basis on a per-bed / room basis. Now the Supreme court states that ‘hotels’ are not plant or machinery. By forming a parallel between PG accommodations and hotels, credit would certainly become a formidable challenge. One argument still prevailing after the retrospective amendment would be in cases where the construction is suited for ‘overall lease as a PG accommodation’ with local municipal licenses evidencing this fact. But where the owner himself operates such business, the operating income being in the nature of short-term accommodation would not permit it to claim credit based on the SC’s decision. Revenue will argue that this is not lease in the sense articulated by the Supreme Court and since the operations of the premises is under the occupation and control of the owner of the premises. Therefore, credit on such structures would fairly deniable.

On an overall basis it is slightly intriguing that business contributing to GST revenue using civil structures are being denied credit. An input in the form of lease rentals which comprises of all the capex cost of a civil structure are eligible but similar inputs where construction has been performed for self-occupation are being termed as ineligible. Is this encouraging unwarranted tweaks to business models merely for availing ITC benefit? These rulings have left an indelible mark on the future of the input tax credit on construction matters and would guide business decisions on account of the sheer volume of ITC involved. The legal fraternity would refer to these decisions time and again to press their respective contentions on a subject matter. The last word on this subject is yet to be told…!!

Recent Developments in GST

A. NOTIFICATIONS

i) Notification No.1/2025-Central Tax dated 10th January, 2025

By the above notification, the due date for furnishing FORM GSTR-1 for the month of December, 2024 and the quarter of October to December, 2024 is extended to 13th January, 2025, and 15th January, 2025 respectively.

ii) Notification No.2/2025-Central Tax dated 10th January, 2025

By the above notification, the due date for furnishing FORM GSTR-3B for the month of December, 2024 and the quarter of October to December, 2024 is extended to 22nd January, 2025 and 24th January, 2025 respectively.

iii) Notification No.3/2025-Central Tax dated 10th January, 2025

By the above notification, the due date for furnishing FORM GSTR-5 for the month of December, 2024 is extended till 15th January, 2025.

iv) Notification No.4/2025-Central Tax dated 10th January, 2025

By the above notification, the due date for furnishing FORM GSTR-6 for the month of December, 2024 is extended till 15th January, 2025.

v) Notification No.5/2025-Central Tax dated 10th January, 2025

By the above notification, the due date for furnishing FORM GSTR-7 for the month of December, 2024 is extended till 15th January, 2025.

vi) Notification No.6/2025-Central Tax dated 10th January, 2025

By the above notification, the due date for furnishing FORM GSTR-8 for the month of December, 2024 is extended till 15th January, 2025.

NOTIFICATIONS (RATES)

CBIC has issued Notifications Central Tax (Rates)1 to 8 on 16th January, 2025. The effective date of notification and effect thereof may be summarized in brief, as follows:

CTR-1, effective from 16th January, 2025, notifies the rate of tax applicable on Fortified Rice Kernel. (Reduced from 18 per cent to 5 per cent). It also redefines the expression ‘pre-packaged and labelled’, for all commodities intended for retails sale.

CTR-2/2025, effective from 16th January, 2025, provides exemption from tax to “Gene Therapy”.

CRT-3/2025, effective from 16th January, 2025, provides for concessional rate of tax on food inputs of food preparations intended for free distribution to economically weaker section under a Government program.

CRT-4/2025, effective from 16th January, 2025, provides for increase in GST rate applicable on sale of old and used motor vehicles (from 12 per cent to 18 per cent).
(The taxable value is determined based on the margin of the supplier – same as earlier).

CRT-5/2025, is in respect of the rate of tax applicable on hotel accommodation services. (Effective from 1st April, 2025). The applicable rate of tax on such services, will now be decided based on the concept of “specified premises’” for a financial year, instead of earlier system of “declared tariff”.

CRT-6/2025, is in respect of certain services of insurance provided by the Motor Vehicle Accident Fund. (Effective from 1st April, 2025)

CRT-7/2025, effective from 16th January, 2025, provides for certain changes in applicability of provisions of RCM. Accordingly, now (1) “sponsorship services” provided by ‘any person other than a body corporate’ will attract RCM. (earlier the wordings were: ‘provided by any person’). (2) RCM, in respect of renting of Immovable Property (other than residential dwelling), provided by an un-registered person to a registered person, will not be applicable to those registered persons who have opted for ‘composition scheme’.

B. CIRCULARS

(i) Clarification on ITC availed by Electronic Commerce Operators – Circular no.240/34/2024-GST dated 31st December, 2024.

By the above circular, clarification is provided in respect of input tax credit availed by electronic commerce operators, where services specified under Section 9(5) of CGST Act are supplied through their platform.

(ii) Clarification on ITC as per section 16(2)(b) of CGST – Circular no.241/35/2024-GST dated 31st December, 2024.

By the above circular, clarification is provided on availability of input tax credit as per section 16(2)(b) of CGST Act in respect of goods, which have been delivered by the supplier at his place of business under Ex-Works Contract.

(iii) Clarification on place of supply of Online Services supplied to Unregistered recipient – Circular no.242/36/2024-GST dated 31st December, 2024.

By the above circular, clarification is provided in respect of place of supply of Online Services supplied by the suppliers of services to unregistered recipients.

(iv) Clarifications on issues related to GST treatment of voucher – Circular no.243/37/2024-GST dated 31st December, 2024.

By the above circular, clarification is provided on various issues pertaining to treatment of vouchers under GST.

C. ADVISORIES

i) Vide GSTN dated 18th December, 2024, guidance is provided for Entry of RR No./eT-RRs following the Integration of E-Way Bill with Freight Operation Information System of Indian Railways.

ii) Vide GSTIN dated 17th December, 2024, the information about updating to E-Way Bill and E-Invoice Systems is provided.

iii) Vide GSTIN dated 15th December, 2024, the information about Biometric based Aadhaar Authentication and Document Verification for GST Registration Applicants of Chhattisgarh, Goa and Mizoram is provided.

iv) Vide GSTIN dated 1st January, 2025, the information related to extension of E-way bills expired on 31st December, 2024, is provided.

v) Vide GSTIN dated 31st December, 2024, the information about Biometric based Aadhaar Authentication and Document Verification for GST Registration Applicants of Arunachal Pradesh is provided.

vi) Vide GSTIN dated 14th January, 2025, the information about Waiver scheme under Section 128A is provided.

vii) Vide GSTIN dated 14th January, 2025, the information about Generation date for Draft GSTR-2B for Dec, 2024 is provided.

viii) Vide GSTIN dated 8th January, 2025, the information about Biometric based Aadhaar Authentication and Document Verification for GST Registration Applicants of Rajasthan is provided.

ix) Vide GSTIN dated 7th January, 2025, the information about enabling of filing of Application for Rectification as per Notification no.22/2024-CT dt.8th October, 2024 is provided.

D. INSTRUCTIONS

The CBIC has issued instruction No.1/2025-GST dated 13th January, 2025 by which, instructions about guidelines for arrest and bail in relation to offences punishable under the CGST Act, 2017, are revised.

E. ADVANCE RULINGS

‘Tolerating an Act’ – Scope

Chamundeswari Electricity Supply Corporation Ltd. (AAR Order No. KAR/AAAR/02/2024 dated 6th November, 2024 (Kar)

The present appeal has been filed by the appellant, M/s. Chamundeswari Electricity Supply Corporation Limited, against the Advance Ruling order No. KAR/ADRG/09/2023 Dated: 27th February, 2023 – 2023-VIL-39-AAR.

The facts are that the appellant is a public sector company of Government of Karnataka, engaged in the distribution of electricity and supply of electric power in the districts of Mysore and others.

The Appellant is supplying electricity for housing, irrigation and also for all kinds of commercial and non-commercial purposes to the cliental comprising of individuals, farmers, organisations, hospitals, government organisations, commercial establishments, industries etc.

To meet the huge energy demand and universal supply obligation, it purchases power from central and state generating stations, private power generators which also include generators from non-conventional sources like wind, solar, mini hydel etc. The retail tariff is determined by the Karnataka Electricity Regulatory Commission, (KERC) as per the Electricity Act, 2003.

As per scheme, such Industries or companies can also buy power from private generators notwithstanding that they have entered into agreement with the appellant under “Open Access Consumers” (“OA Consumers” for short). To comply with the obligations created in agreement with its customer, the appellant enters into back-to-back Power Purchase Agreements (PPA) with private and state-owned energy generators to purchase power as back up for seamless supply of electricity assured to such customers.

The further relevant facts are as under:

The appellant collects an Additional Surcharge, the subject matter of this appeal, from Consumers when Consumers opt to buy electricity from third party private generators by invoking an open access clause.

The appellant has to pay third-party generators. Appellant recovers said amount from its customers under the heading of ‘Additional Surcharge’. The issue was about the liability of GST on the above collection.

In the above factual scenario, the appellant filed application for AR raising various different questions. The question (vii) was as under:

“vii. Whether Additional Surcharge collected from Open Access Consumer as per sub section (4) of Section 42 of the Electricity Act, 2003, clause 8.5.4 of the Tariff Policy 2016. Clause 5.8.3 of the National Electricity Policy and Clause 11(vii) of the KERC (Terms and Conditions for Open Access) Regulations, 2004, is taxable under the GST Acts?”

The ld. AAR answered the said question as under:

“vii. Additional Surcharge collected from Open Access Consumer as per subsection (4) of Section 42 of the Electricity Act, 2003, clause 8.5.4 of the Tariff Policy 2016, Clause 5.8.3 of the National Electricity Policy and clause 11(vii) of the KERC (Terms and Conditions for Open Access) Regulations, 2004, is taxable under GST Act.”

The main reason of ld. AAR to hold as above was that it interpreted the charges as for ‘tolerating an act’ and hence, a supply of service under GST Act.

The appellant was aggrieved by the above decision of ld. AAR and hence this appeal to ld. AAAR.

The ld. AAAR went through elaborate submission / grounds of appeal of the appellant. The main argument of appellant was that the appellant is collecting additional surcharge as per the Electricity Act; Tariff Policy; National Electricity Policy of Ministry of Power, Government of India and Karnataka Electricity Regulatory Commission (Terms and conditions for open Access) Regulation, 2004, KERC (Electricity Supply) Code, 2004 of Karnataka Electricity Regulatory Commission, Government of Karnataka from the open access customers, and therefore it forms part of tariff for the supply and distribution of electricity and cannot be taxable as separate service by way of ‘tolerating an act’.

The ld. AAAR also referred to Circular 178/10/2022-GST dated 3rd August, 2022 in which the concept of supply vis-à-vis ‘tolerating an act’ is explained.

The ld. AAAR observed that the collection of Additional Surcharge from OA consumers based on quantum of energy wheeled from the private generators is only to meet the fixed cost of the appellant arising out of this obligation to supply. Such collection mechanism is backed by an Act and policies of Central Government as well State Government. The ld. AAAR also observed that, the Appellant has entered into agreements with their customers, basically for supply of electricity and the money is collected by the Appellant in the form of Additional Surcharge, in situations where OA customer is not purchasing the entire requirement of electricity from them. The ld. AAAR also observed that there is no express or implied promise by the Appellant to agree to do or abstain from doing something in return for the money paid to them, rather they are ready to supply electricity as per the agreement. The ld. AAAR also observed that there is no independent arrangement entered into by the appellant for tolerating an act against which the consideration is collected as Additional Surcharge and, therefore, such amount do not constitute payment (or consideration) for tolerating an act.

Referring to section 15(2)(a), which provides that any taxes, duties, cesses, fees and charges levied separately under any law for the time being in force, other than GST, should be part of valuation of supply, the ld. AAAR held that Additional Surcharge levied under Electricity Act on their customers is part of taxable value and exempt along with electricity charges in terms of entry No. 104 of Notification No. 02/2017 CT(R) dated 28th June, 2017 applicable to goods and /or entry No.25 of the Notification No.12/2017-Central Tax (Rate) dated 28.06.2017 applicable to services and therefore not liable to tax.

The ld. AAAR thus allowed appeal in favour of appellant.

TAXABILITY OF VOUCHERS

Payline Technology Pvt. Ltd. (AAAR Order No. 04/AAAR/23/09/2024 dated 23rd September, 2024 (UP)

This appeal was filed by M/s. Payline Technology Pvt. Ltd. against the advance ruling no. UP ADRG-43/2024 dated 20.02.2024-2024-VIL-118-AAR, passed by the ld. UPAAR.

The facts are that the appellant is in the business of selling and purchasing Gift Cards, Vouchers, and pre-paid Vouchers closed or semi-dosed-ended vouchers (referred to as cards/voucher) against which goods or services can be purchased from specific brands on e-commerce platforms (such as Amazon, Flipkart, etc.). Appellant purchases cards from entities against advance payments at a discounted price. Thereafter, these vouchers are supplied to clients. The further fact is that once these vouchers are purchased by the appellant from the original issuers, the appellant becomes the
absolute owner of these vouchers, and both risk and reward lie with the appellant. It is noted that the appellant is neither the issuing person nor the user of these Vouchers.

The ld. AAR held that supply of Vouchers by the appellant are taxable @ 18% as per residual entry no.453 of the Third Schedule of Notification No.01/2017-Central Tax (Rate) dt.28th June, 2017.

Before the ld. AAAR, the appellant reiterated its ground that vouchers are very much in the nature of “money” and hence excluded from the definition of “Goods” as well as from “Services”, making the supply of these instruments non-taxable. The judgment in case of Premier Sales Promotion Ltd. relied upon.

It was further submitted that the goods/services are not identifiable at the time of issuance of said vouchers and hence, the time of supply of such vouchers shall fall at the time of their redemption which usually happens only after the cards are sold to the end consumers by the appellant. It was accordingly submitted that, there is no GST liability on cards sold by it.

The ld. AAAR referred to nature of vouchers considering the regulations of the Reserve Bank of India (RBI) in terms of the Payment and Settlement Systems Act, 2007 (PSS)and the guidelines issued there under.

The ld. AAAR observed that the pre-paid payment instruments (PPI, in short) that can be issued in India can be classified under three categories. Looking at Guidelines given by RBI, the ld. AAAR observed that these conditions are mainly applicable to the issuers of the PPIs, and not to its traders, like appellant, as the Appellant is not the issuer of the voucher, but is the third party who buys and sells the vouchers.

The ld. AAR held that, the voucher in the hands of the appellant cannot be termed as “money”.

The ld. AAAR also analysed whether the vouchers are ‘goods’ or ‘services’.

For this purpose, reference made to definition of said terms in CGST Act. The ld. AAAR also verified whether it can be actionable claim. After discussion, the ld. AAAR observed that voucher by itself is a movable property and hence constitutes goods. It is further observed that since the voucher is in the possession of the claimant at the time of claim, it cannot be considered as actionable claim.

Further, referring to section 7(1) of CGST Act, the ld. AAAR held that it is taxable in hands of appellant.

The ld. AAAR deferred with the ld. AAR in respect of time of supply. In AR the ld. AAR has held that the sections 12(2) and 12(4) are not applicable to appellant. However, the ld. AAAR held that the section 12(4) of the CGST Act, 2017 is a specific provision for deciding the time of supply of the vouchers and is applicable to the appellant. Accordingly, the ld. AAAR held that time of supply of vouchers will be determined in terms of Section 12(4) of the CGST Act, 2017.

The ld. AAAR also held that in the present case, the appellant is engaged in trading of Vouchers/coupons and getting commission in the form of discount on such services, which are taxable.

Considering the above, the ld. AAAR held that trading in Vouchers/coupons, being a service, is the taxable event where the time of supply is when the Vouchers/coupons are traded or sold. It is also held that the value of service shall be the margin between the buying and selling price of the coupons.

Accordingly, the ld. AAAR modified AR holding that the supply of Gift voucher is a transaction of supply of goods and time of supply to be decided as per section 12(4) of CGST Act. It is further held that GST is applicable on the commission/discount earned in the trading of Vouchers/Coupons by the appellant and the time of supply will be the time when the Vouchers/ Coupons are traded or sold. It is further held that the value of service shall be the margin between the buying and selling price of the Vouchers/ Coupons.

[Note: The CBIC has issued Circular No.243/37/2024-GST, in which clarifications are given about taxability of voucher under GST.]

VALUATION – FREE OF COST SUPPLY

High Energy Batteries (India) Ltd. (Advance Ruling No. 28/ARA/2024 dated 6th December, 2024 (TN)

The applicant is engaged in manufacture of “Silver Oxide Zinc Torpedo Propulsion batteries” falling under Chapter sub heading No.850640 and secondary Silver Oxide Zinc Rechargeable Batteries falling under Chapter sub heading No. 8501780. It supplies the same to various Naval Defence formations (Indian navy) on payment of applicable GST.

The applicant submitted that the silver required for the manufacture of such batteries is supplied free of cost by the recipient, i.e. Naval formations by way of supplying their used batteries (non-serviceable). It was submitted that after extracting the silver from the used batteries supplied by Naval formations, the applicant manufactures the “Silver Zinc Batteries” as per the specification provided by the Naval formation and supplies the same to them. It was explained that while fixing the price for the batteries manufactured, the cost incurred by the applicant for extracting the silver from the old batteries is also included but the cost of the silver contained in the old batteries, supplied by the Naval formations free of cost in the form of old batteries, is not included in the taxable value for the purpose of payment of GST on the ground that the same is supplied free of cost by the Naval formations, who are the purchasers of the applicant.

It was also explained that the above mode of dealing is included in the contract signed between the applicant and their customer.

With above background, applicant raised following question before the ld. AAR.

“(1) Whether the value of the Silver supplied free of cost by the Naval Formations (in the form of old batteries) are to be included in the taxable value adopted by the applicant on the batteries manufactured by the applicant and supplied to the Naval Formations for the purpose of payment of GST or not.”

The applicant relied upon section 15(1) which provides for valuation as transaction value. The reference also made to definition of ‘consideration’ in section 2(31) of CGST Act. It was submitted that the transaction value agreed between the parties is only relevant for valuation purposes under GST and it is a matter of commercial arrangement between the supplier and recipient, as to what is in the scope of each of the parties. It was submitted that once it is clear that the supplier has to only supply final goods, then there is no question of adding the value of the free materials for determining the transaction value.

The ld. AAR observed that as per section 15(1) value of supply will be transaction value if,

a. the supplier and the recipient of the supply are not related parties.

b. the price is the sole consideration for the supply.

The ld. AAR observed that though the applicant and the recipient are not related persons, the consideration is not paid wholly in money. The ld. AAR, on perusal of the agreement, inferred that the contract is for the supply of Silver Oxide – Zinc Torpedo propulsion Battery Type A- 187M3- Complete with Hardware. It is further observed that the main input namely; Silver, is supplied free of cost against Bank Guarantee in the form of old and used batteries by the recipient, in addition to the consideration in money value for the supply of said Silver Oxide – Zinc Torpedo propulsion Battery. Therefore, the provision of Section 15(1) of the CGST Act, 2017 i.e. to adopt the transaction value as the value of supply of goods or services or both is not applicable for determining the value of supply in the applicant’s case, observed the ld. AAR. The ld. AAR observed that the consideration for the supply of Silver Oxide Zinc Torpedo propulsion Battery is paid in terms of money and Old and used Batteries.

The ld. AAR observed that old and used batteries are supplied by the naval formations i.e., by the Central Government Department to the applicant and for the said supply, unless otherwise exempted, the recipient of the said old used goods, that is the applicant, is liable for payment of Central tax and State Tax or as the case may be the Integrated Tax, as envisaged under Section 9(3) of the CGST Act or Section 5(3) of the IGST Act, read with corresponding Notifications issued, viz., Notification No.36/2017- Central Tax (Rate), dated 13/10/2017 and Notification No. 37/2017 Integrated Tax (Rate) dated 13th October, 2017, respectively.

The ld. AAR in this respect also referred to section 15(4) and Rule 27 and held that value of the taxable supply in case of applicant should be determined as per Rule 27(b) of CGST Rules,2017.

BLOCKED ITC U/S.17(5)(A) – NATURE OF EXCEPTION

A2Mac1 India Pvt. Ltd. (Advance Ruling No. 29/ARA/2024 dated 6th December, 2024 (TN)

The applicant is incorporated under the Indian Companies Act and is engaged in providing ‘Collaborative Automobile Benchmarking services’ by data management to the customers as a subscription package through an online platform where the detailed analysis of software concept of structure, process and global benchmarking data is made available.

From the database, the subscribers of the applicant get 360 degrees vehicle insights such as technology insights, cost insights, performance insights, market insights, sustainability insights, software insights, supply chain insights etc. and can use it for its own purpose. The applicant earns from subscription.

For vehicle benchmarking, the Applicant purchases brand new cars in the domestic market, disassembles them and adds research data to the corpus knowledge database for providing various insights to the customers. Motor vehicles bought by the Applicant are wholly and exclusively used for automotive research purpose carried out at the applicant’s factory. Hence, these vehicles are temporarily registered with RTO (Regional Transport Office).

The applicant also furnished a detailed process flow of the activities undertaken by it connected to vehicle dynamic benchmarking process with relevant images.

The cost of the vehicle bought and used for automotive benchmarking process is expensed out in the books by applicant. Further, at the end of specific/vehicle retention period, they are sold and the applicant is of the view that it is an activity of ‘supply’ in the course of its business and discharges applicable GST on such transactions.

The applicant was of view that ITC of tax paid on the purchase of new vehicles/cars is available to him as the applicant is providing taxable service using vehicles/cars for research purposes and the purchase of vehicles / cars are integral part of the business model. It was submitted that the cost of purchase of vehicles / cars are predominant to the business without which the main revenue stream of the Applicant i.e., supply of services via platform subscription would fail.

In above fact, the applicant sought to know whether the input tax credit on the purchase of vehicles/cars is claimable or not, in terms of Section 17(5)(a) of the CGST Act.

The applicant explained its eligibility to ITC on purchase of new motor cars explaining the scheme and intention of ITC with reference to various provisions like section 16(1) and 16(2) on CGST Act. The applicant also demonstrated its eligibility to get out of blocked credit in view of exception in section 17(5)(a)(A) on ground that for the Company’s business, the motor vehicles are indispensable tools for Research Study which in turn offered for subscription to the Customers.

The ld. AAR, for deciding the above issue, referred to section 17(5) which reads as under:

“(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely: –

2[(a) motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver), except when they are used for making the following taxable supplies, namely: –

(A) further supply of such motor vehicles; or

(B) transportation of passengers; or

(C) imparting training on driving such motor vehicles;1

(aa) vessels and aircraft except when they are used-

…………”

The ld. AAR also referred to definition of ‘Motor Vehicle’ as provided in Section 2(76) of CGST which further refers to Motor Vehicles Act,1988 for merging of Motor Vehicles for purpose of GST Act.

The ld. AAR observed that Section 17(5) (a) blocks credit for ‘motor vehicle for transportation of persons’ and exceptions are available only to the three specified activities.

Referring to Circular No.231/25/2024-GST dt.10th September, 2024, the ld. AAR observed that the law is very clear and specific that except for the exceptions provided in sub-clauses (A), (B) and (C), the input tax credit on the purchase of vehicles, irrespective of any kind of outward supplies, shall not be eligible.

The ld. AAR observed that the applicant is seeking eligibility to ITC on the ground that the motor vehicles, used by them for making exhaustive analysis, are sold and the applicant is of the view that it is activity of ‘supply’ in the course or furtherance of business and discharges applicable GST on such transaction. However, the ld. AAR did not approve eligibility to ITC on above basis as it is not within Exception clauses (A), (B) and (C).

The ld. AAR, on perusal of the sample invoices relating to supply of motor vehicles after retention period, saw that the applicant is not classifying the product after use as ‘used or old motor vehicles’ but are supplying it as scrap of ‘Automobile part’ paying GST @ 18 per cent (CGST-9 per cent and SGST-9 per cent). The ld. AAR observed that the applicant is supplying the goods as ‘Scrap’ and therefore, the activity will not also fall within the scope of ‘further supply of such motor vehicles’. Accordingly, the ld. AAR held that the applicant cannot claim the exception and was not eligible to avail ITC on the motor vehicles purchased by them.

CLASSIFICATION – CHANGE OF TARIFF – PARTS OF SHIP

Imtiyaz Kaiym Barvatiya (Advance Ruling No. GUJ/GAAR/R/2024/19 (in application no.Advance Ruling/SGST&CGST/2023/AR/17) dated 3rd September, 2024 (Guj)

The facts are that the applicant imports various goods/spares, which are supplied on ships and it is the applicant’s contention that this equipment forms an essential part of the ship and makes the ship ‘sea worthy’. The goods are imported by the applicant on payment of IGST. The appellant has provided detailed list of equipments by way of Annexure. The name of equipments, description and utility as part of ship is explained in the said chart.

The applicant stated that they charge GST on parts/equipment supplied by them on the ship by classifying it under the same tariff head under which the goods are imported and discharges GST liability on supply based on rates applicable to such tariff entry. Instance is given that a “Standard Solas Model” is classified under tariff head “8479” captioned as “Ship Spares” and is taxed at the rate of 18 per cent.

The applicant has further stated that the customer insists for GST at 5 per cent on the reasoning that these goods form part of ship and are covered at Sr. No. 252 of notification No. 1/2017-Central Tax (which covers parts of goods of headings 8901, 8902, 8904, 8905, 8906, 8907).

With above background the applicant has raised the following question for advance ruling viz;

“To decide as to whether the supply of goods [as listed in Annexure I-A of this ARA application is classifiable as “parts of goods of headings 8901, 8902, 8904, 8905, 8906, 8907” under entry 252 of Schedule I of GST Notification No. 01/2017-Central Tax (Rate) dated 28.6.2017 as amended and is liable to GST @ 5% (CGST-2.5% and SGST-2.5%) or IGST @ 5% or not.”

The applicant has relied upon the AAR ruling in the case of M/s. A. S. Moloobhoy Private Ltd. dated 18.7.2018 passed by the Maharashtra Authority for Advance Ruling-2018-VIL-232-AAR.

The ld. AAR reproduced entry 252 as under:

“Notification No. 1/2017-Central Tax dated 28.6.2017 Schedule I – 2.5%

The ld. AAR referred to the classification mechanism under GST including notes for classification under Customs Tariff.

The ld. AAR referred to one of the items for determination viz. “Standard Solas Model”, wherein the goods are classified under chapter heading 8479 as ‘ship spares’ and liability is discharged @ 18 per cent.

The ld. AAR noted that the applicant imports the goods and during the importation, the goods are classified by Customs under the Customs Tariff Act, 1975, and the applicant discharges the relevant customs duties including the IGST, which is applicable. It is also noted that the applicant willingly discharges the duties involved, which leads to the inference that he has agreed to the classification of the imported goods as done by the proper officer of Customs.

The ld. AAR observed that;

“18. On the aforementioned background, we find that the applicant is before us with an averment, that though the goods have been classified by Customs under various tariff items [as is mentioned in column 4 of the table above in respect of the bills of entry, the copies of which has been submitted vide email dated 29.7.2024] he now feels that consequent to the importation while undertaking further supply of the said goods, it should be classified under the heading 8901, 8902, 8904, 8905, 8906 & 8907 and thereby be eligible for benefit of Sr. No. 252 of notification No. 1/2017- CT (R) dated 28.6.2017. Availing the benefit of the said exemption notification, will make the supply leviable to GST @ 5%.”

In view of above the ld. AAR was to decide whether a change in classification is permissible.

The ld. AAR has opined in negative and held that change of classification is not permissible. The reasoning is based on the following factors.

“[a] the applicant without any protest agreed with the classification done by Customs and discharged the duties; and

[b] classification under GST is based on Customs Tariff Act, 1975, in terms of explanation (iii) and (iv) of notification No. 1/2017-CTR dated 28th June, 2017;

[c] that there is no change in the character of the goods supplied by the applicant to the one imported.”

The ld. AAR did not agree with the reliance of the applicant on the advance ruling dated 18th July, 2018 in the case of A S Moloobhoy Private Limited on the ground that it is applicable only to A S Moloobhoy Private Limited in terms of section 103 of the CGST Act, 2017.

In view of the above, the ld. AAR gave a ruling that the supply of goods given in application is classifiable under the same chapter, heading, sub-heading and tariff item under which the goods were imported and the rate of the supply of said goods would be in terms on the rates applicable to such respective tariff entry.

Goods And Services Tax

HIGH COURT

88. Gujarat Chamber of Commerce and Industry and Others vs. Union Of India & Others

2025-TIOL-48-HC-Ahm-GST

Dated: 3rd January, 2025

Assignment by transfer of leasehold rights for plot of land allotted by GIDC to the Lessee in favour of third party against consideration is not supply of service because it is a transfer of immovable property. Also, stay of operation of the judgement not provided to Revenue.

FACTS

i) GIDC, a Nodal agency of Government of Gujarat acquired land in the past and developed it for development of industrial estates in Gujarat, similar to other corporations in other States of India. Consequently, GIDC entered into execution of lease deed for 99 years in favour of various lessees upon terms and conditions. Some of these lessees had transferred their leasehold rights in GIDC land along with constructed building for industry/business to third parties by entering into an assignment deed against consideration for the balance period of lease. while also seeking approval of GIDC for such transfer against payment of fees to GIDC. GST authorities issued summons / show cause notices after 1st July, 2017 to various assignees to whom the leasehold rights were assigned / transferred by original / subsequent lessees proposing to levy GST @18 per cent on the consideration received/paid for the transactions of assignment/transfer. To examine the issue as to whether such transactions amount to “supply of service” as defined under section 7 of the CGST Act, 2017 to attract the levy of GST, various terms defined under the said CGST Act, 2017, viz. business, goods, registered person, services, supplier, taxable person and importantly, the definition of ‘supply’ were examined and analysed in detail besides examining the terms ‘lease’ and “Immovable Property” under Transfer of Property Act.

ii) The ownership of the plot of land allotted by GIDC remains with it and only the right of possession and occupation are transferred by way of leasehold rights to such third party/assignee.

iii) Various petitioners inter alia contended that transfer/assignment of leasehold rights is nothing but a sale and transfer of benefits arising out of immovable property, viz. the plot of land which cannot be considered as “supply of services” because sale, transfer and exchange of benefits arising out of immovable property is nothing else but sale, transfer and exchange of the immovable property itself. Hence, tax cannot be levied under GST Act as the same does not amount to ‘supply’ for the purpose of section 7 of the CGST Act. The scope of the said section 7 of the GST Act requires to be considered by analysing various provisions of different Acts as to what is an “immovable property” because the term, immovable property is not defined under the GST law. Further, it also requires to be examined whether leasehold rights can be said to be benefits arising out of such immovable property and hence qualify to be covered by item no. 5 of Schedule III of CGST Act which shall be treated neither as supply of goods nor a supply of service.

iv) Petitioners submitted and Hon. High Court analysed and examined a number of provisions of relevant Acts including Transfer of Property Act, The Indian Stamp Act, 1899 etc. to analyse the term “immovable property” and the term ‘lease’ and in such context, a host of precedents were also referred to and/or relied upon.

v) On behalf of Revenue, Ld. Advocate General drew distinctions between “immovable property” and “interest in immovable property”, i.e. difference between tangible rights and intangible rights in the immovable property to contend that immovable property is as such not taxable under the GST law whereas interest in immovable property like leasehold rights transferred by way of sale is liable to the levy of GST falling within the scope of “supply of services” and relied upon various relevant precedents in support of such contention.

HELD

a) When GIDC allotted a plot of land along with the right to occupy, right to construct, right to possess on a long-term basis, it is a supply of service as the right of ownership of the plot in question remains with GIDC which reverts on expiry of the lease period. As against this, the transaction of sale and transaction of leasehold rights by the lessee-assignor in favour of a third party-assignee, divest the assignor of all the absolute rights in the property. Hence, the interest in the immovable property is not different than the immovable property itself.

b) Therefore, when lessee-assignor transfers absolute right by way of sale of leasehold rights in favour of the assignee, the same shall be a transfer of “immovable property”, as leasehold rights is nothing but benefits arising out of the immovable property which according to other statutes would be immovable property, as the GST Act has not defined the term ‘immovable property’.

c) In such circumstances, leasehold rights are nothing but interest in immovable property in terms of section 105 r.w.s108(j) of the Transfer of Property Act and constitutes absolute transfer of rights in such property (because the legal relationship between GIDC and the assignor-lessee comes to an end and the third party-assignee becomes lessee liable for obligation under the Assignment Deed vis-à-vis the GIDC). Such transaction therefore is not one of supply of service but that of immovable property. For this, Hon. High Court relied on Hon’ble Apex Court in case of Gopal Saran vs. Satya Narayana (1989) 3 SCR 56 wherein definition of assignment as per Black’s Law Dictionary, Special Deluxe Edition page 106 is referred to as assignment means “is a transfer or making over to another of the whole of any property, real or personal, in possession or in action, or of any estate or right therein”. It was further held that assignment would include “transfer by a party of all its rights in lease, mortgage, agreement of sale or a partnership.” In view of this definition of assignment, assignment of leasehold rights is also subject to levy of stamp duty being transfer of “immovable property.”

d) Hon. High Court also noted that in case of Munjal Bhatt vs. UOI 2022-TIOL-663-HC-AHM-GST this Court also observed that the intention of GST regime was not to change the basis of taxation of the Value Added and service tax regime and that supply of land in every form was excluded from the purview of GST Act.

e) The Court further observed that in various cases, GIDC allotted the plot of land to the lessee who constructed the building and developed the land to run the business / industry. Hence what is assigned for a consideration is not only land allotted by GIDC but the entire land with the building constructed on such land along with leasehold rights and interest in land which is a capital asset in the form of “immovable property”. Thus lessee earned benefits there from constructing and operating factory which constitutes “profit in prendre” which is also an immovable property. Therefore not subject to tax under GST Act as clause 5 of Schedule III of the GST Act clearly excludes sale of land and building which fortifies the intention of GST Council not to impose tax on transfer of immovable property continuing the underlying object of erstwhile service tax regime. To analyse” profit in prendre”, relevant discussions in Anand Behera vs. State of Orissa Air 1956 SC 17 and State of Orissa vs. Titaghur Paper Mists Co. Ltd. (1985) Supp SCC 285 were referred to and relied upon. Hon. High Court disagreed with the contention of the Revenue that exclusion from GST for sale of land and building as per Schedule III, would not include transfer of leasehold rights as the interest in immovable property is in intangible form and hence, is covered by the scope of ‘supply’ as per section 7 of the GST Act. The Hon. High Court held that assignment is nothing but absolute transfer of right and interest arising out of land and hence, cannot be considered a service as contemplated under the GST Act. Also, assignment / transfer of rights is outside the scope of supply of service.

f) In view of above, question of utilization of input tax credit to discharge GST on such transactions does not arise and the prayer on behalf of the revenue for stay of operation and implementation of the judgment also was rejected.

89 M. Trade Links vs. Union of India

[2024] 163 taxmann.com 218 (Kerala)

Dated: 4th June, 2024

The High Court rejected the challenge to the constitutional validity of section 16(2)(c) and section 16(4) of the Central Goods and Services Act (CGST Act) but held that for the period from 1st July, 2017 till 30th November, 2022, if a dealer has filed the return after 30th September and the claim for ITC was made before 30th November, the claim for ITC of such dealer should also be processed, if he is otherwise entitled to claim the ITC.

FACTS

In this case, the Petitioners raised the following issues before the Hon’ble Court:

(i) Section 16(2)(c) be declared as unconstitutional and violative of Articles 19(1)(g) and Article 300A of the Constitution of India;

(ii) In the alternative, the provision of section 16(2)(c) may be read down and if the recipient dealer sufficiently establishes that he has paid the tax to the supplier and the default is on the part of the supplier dealer, the ITC should not be denied to the recipient dealer and the action should be taken against the supplier dealer who has defaulted in posting the tax collected from the recipient dealer;

(iii) ITC is a matter of right and not a concession. Hence, the denial of ITC on a mismatch with the figure mentioned in the auto-populated documents in FORM GSTR-2A is unjustified. Authorities must conduct an enquiry and should verify the documents in possession of the purchaser or the recipient dealer to ascertain the bona fide of such a dealer in claiming the ITC on supplies received from the supplier dealer.

(iv) Ona reading the provision of sections 39, 41, 44 and 50, which permit relaxation in furnishing returns, filing returns with late fees and payment of tax with interest on the late period is permitted. The provision under section 16(4) mandating submission of a claim for ITC within a particular time should be read as a directory and not mandatory.

(v) The Court may read down section 16(4) to give effect to the amended provision of providing the 30th day of November for the due date for furnishing the return under section 39 for the month of September with effect from 1st July, 2017, considering the peculiar nature of difficulties in initial period of implementation of the GST regime.

(vi) The actual availment of credit happens in the books of account, and it is merely disclosed through the GST return. Hence, the availment of ITC is not dependent on the filing of GSTR-3B. Therefore, if an assessee can prove with evidence that the credit was availed in the books of account within the time limit prescribed in section 16(4), claim the ITC would be in compliance with section 16(4).

HELD

(i) Referring to various decisions, the Court held that both Central and State legislation have the power to enact the CGST / SGST Act, and the Constitution prescribes no limitation for enacting such legislation. Therefore, these legislations are valid legislations.

(ii) In light of the decisions in the cases of Godrej & Boyce Manufacturing Company (P.) Ltd 1992 taxmann.com 967 (SC), India Agencies vs. Addl. Commissioner of Commercial Taxes 2006 taxmann.com 1841, Jayam& Co. vs. Assistant Commissioner [2016] 15 SCC 125], ALD Automotive (P.) Ltd. vs. CTO [2019] 13 SCC 225 and VKC Footsteps (India) (P.) Ltd. 2021] 130 taxmann.com 193, the Hon’ble Court did not find substance in the submissions of the Learned Counsel for the petitioners that section 16(1) of the GST Act provides an absolute right to claim Input Tax Credit and conditions in sub-section (2) of section 16 cannot take away the right conferred under sub-section (1) of Section 16.

(iii) The Court further held that the Scheme of the Act also provides that only tax collected and paid to the Government could be given as input tax credit. When the Government has not received the tax, a dealer cannot be given an input tax credit. Referring to the scheme of transfer of credit under section 53 of the IGST Act, the Hon’ble Court felt that without section 16(2)(c) where the inter-state supplier’s supplier in the originating State defaults payment of tax (SGST+CGST collected) and the inter-state supplier is allowed to take credit based on their invoice, the originating State Government will have to transfer the amounts it never received in the tax period in a financial year to the destination States, causing loss to the tune of several crores in each tax period. It therefore held that the conditions on entitlement of ITC cannot be said to be onerous or in violation of the Constitution, and section 16(2)(c) is neither unconstitutional nor onerous on the taxpayer and that the respondents cannot contend that the conditions, restrictions, and time limits for ITC and time-bound tax collection in a financial year can be substituted or replaced with recovery actions against defaulters, the outcome of which is uncertain and not time-bound. The Court also held that section 16(2) restricts the eligibility under section 16(1) for entitlement to claim ITC. Section 16(2) is the restriction on eligibility and section 16(4) is the restriction on the time for availing ITC. These provisions cannot be read to restrict other restrictive provisions, i.e. sections 16(3) and 16(4). The challenge to the constitutional validity of section 16(2)(c) and section 16(4) of the CGST Act are thus rejected.

(iv) Lastly the Hon’ble Court held that where for the period from 1st July, 2017 till 30th November, 2022, if a dealer has filed the return after 30th September, and the claim for ITC was made before 30th November, the claim for ITC of such dealer should also be processed, if he is otherwise entitled to claim the ITC. The amendment in section 39 of the CGST Act by section 105 of the Finance Act 2022 (refer to amendment to section 16(4) of the CGST Act by section 100 of the Finance Act, 2022 notified with effect from 1st October, 2022) is procedural and has a retrospective effect. Accordingly, the time limit for furnishing the return for the month of September is to be treated as 30th November in each financial year with effect from 1st July, 2017.

90. L and T PES JV vs. Assistant Commissioner of State Tax

[2025] 170 taxmann.com 181 (Telangana)

Dated: 29th November, 2024

Where the contract sponsored by the State of Telangana was executed partly in Maharashtra and partly in Telangana and the Telangana State Agency has deducted TDS under section 51 of the CGST Act on the entire contract value, including the value in respect of which the petitioner has paid tax in the State of Maharashtra treating the same as Intra-State supply, the State Agency was not required to deduct the turnover taxed in the State of Maharashtra. Consequently, the petitioner’s application for refund in respect of the said TDS lying in the electronic cash ledger of the State of Telangana should not be denied. Where construction works is spread over multiple state boundaries, works executed would be intra-State and liability will be discharged in proportion to work done in each state.

FACTS

Petitioner is an unincorporated Joint Venture (JV), comprising of two partners viz. Larsen & Toubro Ltd (L&T) and PES Private Limited. The petitioner has received a contract from State of Telangana, for construction of Irrigation Barrage, the execution of which was spread over the State of Maharashtra and State of Telangana. The petitioner obtained separate GST registrations in the State of Maharashtra and State of Telangana and reported turnover based on work executed in respective States treating them as Intra-State supplies. However, Telangana State Agency, deducted TDS under section 51 of the CGST Act on the entire contract value (including the portion of turnover which was reported by the petitioner in Maharashtra State). The petitioner discharged tax liability independently in State of Maharashtra and filed a refund application for TDS portion on the said turnover accumulated in the Electronic Cash Ledger of the State of Telangana. In the meanwhile, on a comparison of GSTR-7A and GSTR-1, the former revealed much higher turnover (as it also included the value of the turnover pertaining to Maharashtra). Accordingly, a show cause notice was issued to the petitioner making them liable to pay tax on the entire contract value in the State of Telangana.

HELD

The Hon’ble Court held that the contract in the instant case is for undertaking works contract services and hence, the place of supply of services would fall under section 12(3) of the IGST Act and not under section 12(2)(a) of the CGST Act. Since, the work was admittedly carried out in both the States, the place of supply of service shall be treated as made in each State equivalent to the proportion of work executed in that State, in accordance with the terms of the agreement as specified in the explanation to section 12(3) of IGST Act.

The Hon’ble Court further held that as the State of Telangana was not a registered deductor in the State of Maharashtra, in terms of proviso to section 51 of the CGST Act, the Telangana State Agency can only deduct GST for the invoices raised by the supplier located in Telangana for the works executed in Telangana and ought not to have deducted GST in respect of the bills raised for the works executed in Maharashtra. The Court accordingly held that if the State of Telangana had not transferred tax liability to the extent of work executed in State of Maharashtra to the tax authorities in the State of Maharashtra, there was no reason on part of Telangana State authorities in not granting refund, upon petitioner providing relevant material, proof evidencing discharge of tax liability in the State of Maharashtra.

91. Mrs. Lakshmi Periyasamy vs. State Tax Officer

[2025] 170 taxmann.com 133 (Madras)

Dated: 25th November, 2024

Order passed after the death of the assessee is null and without jurisdiction. The petition under Article 226 is thus maintainable.

FACTS

The petition was filed before Hon’ble Court on a limited ground that impugned order u/s 62 of the CGST Act was made in the name of a dead person (who was husband of the petitioner) subsequent to his death.

HELD

The Hon’ble Court held that the assessment order passed in name of dead person is nullity and without jurisdiction and thus is an exception to rule of alternative remedy and hence can be entertained under Article 226. The impugned order was set aside.

92. Vigneshwara Transport Company vs. Additional Commissioner of Central Tax

[2025] 170 taxmann.com 264 (Karnataka)

Dated: 28th November, 2024

Proper Officer cannot issue show cause notice under section 74 of the CGST Act on “borrowed satisfaction”. When investigation including search and seizure was conducted by other officer and the matter was transferred to Proper Officer for want of jurisdiction, the Proper Officer was required to redo the investigation and come to an independent conclusion as contemplated under section 74 of the CGST Act.

FACTS

Petitioner was transporting goods and was registered under the provisions of the CGST Act, 2017. The investigation was initiated against the petitioner on the ground that the petitioner along with several other persons indulged in purchase of areca nut from several persons and supplying the same to various Gutkha manufacturers without payment of appropriate applicable GST. Accordingly, a show cause notice was issued to the petitioner.

Aggrieved, the present writ petition was filed on the ground that investigation was initiated against the petitioner without valid jurisdiction. It was submitted that pursuant to the initiation of such investigation; inspection, search and seizure of several premises belonging to the petitioner as envisaged under Chapter 14 of the CGST Act / KGST Act was carried out, certain materials were seized and the petitioner was called upon for questioning and his statements were recorded. Further, the petitioner was forced to make an adhoc payment towards probable liability during investigation and the same was paid by the petitioner under protest. It was also contended that the inspection, search and seizure was not conducted by a Proper Officer and that when the department realised the same, the case was transferred to the Proper Officer, to conduct the necessary investigation. But the said Proper Officer instead of conducting the investigation afresh, relying upon the records built by other officer issued a show cause notice under section 74 of the CGST Act and KGST Act.

HELD

The Hon’ble Court held that in instant case, a substantial part of investigation including search and seizure of materials had been done by the person who was not Proper Officer and under circumstances, said investigation, inspection, search and seizure was to be considered void ab initio. When the same is considered as ab initio void, notice issued under section 74 of the CGST Act based upon search, seizure and the statements recorded from the petitioner which has been relied upon, has to be considered illegal and that there is no satisfaction on part of the Proper Officer for issuing of the notice under section 74 of the CGST Act. The Court held that the Proper Officer was required to re-investigate and come to an independent conclusion as contemplated under section 74 of the CGST Act and only thereafter a fresh notice could be issued. Under said circumstances, the Hon’ble Court set aside the impugned notice and directed respondents to refund amount deposited by assessee and also return seized documents and other goods.

93. LJ- Victoria Properties Pvt. Ltd. vs. Union of India

(2024) 24 Centax 270 (Bom.)

Dated: 19th November, 2024

There is no bar on conducting Audit under section 65 of CGST Act even where registration was already cancelled and business was closed.

FACTS

Petitioner filed an application for cancellation of registration on 27th March, 2023 citing business closure. The registration was cancelled with effect from 2nd May, 2023. However, on 6th November, 2023, respondent issued a notice to conduct an audit for the F.Y. 2020-21. Petitioner refused to cooperate stating that audit cannot be conducted as per section 65 of the SGST Act once registration is cancelled. However, respondent proceeded with the audit and concluded that there was non-reversal of ITC and excess of ITC claims in its audit report. Being aggrieved by such audit proceedings, petitioner filed a writ petition before Hon’ble High Court.

HELD

Hon’ble High Court held that the provisions of section 65 of the CGST Act, 2017 apply to conduct an audit for a F.Y. during which a person was registered under GST, even if the registration was subsequently cancelled. The Court emphasized that cancellation of registration under section 29(3) does not absolve a person from obligations under the Act or prevent audit proceedings for the relevant period when the person was registered. Consequently, writ petition was challenging validity of audit was dismissed and decided against petitioner.

94. SBI General Insurance Company Ltd. vs. Union of India

(2024) 24 Centax 158 (Bom.)

Dated: 24th October, 2024

Appeals should not be dismissed by adopting a hyper technical approach without conducting proper verification and providing an opportunity to rectify the same.

FACTS

Petitioner filed an appeal against impugned order passed by an adjudicating authority. Respondent dismissed petitioner’s appeal on a technical ground that the signature present in the appeal memo was not done by the authorised signatory without verifying the GST portal and that no evidence regarding the same was provided by the petitioner. The respondent failed to verify that the signatory was duly authorised, which lead to the dismissal without granting an opportunity to rectify the alleged defect or prove authorisation. Aggrieved by such dismissal, petitioner challenged the impugned Order-in-Appeal before Hon’ble High Court.

HELD

Hon’ble High Court held that dismissing an appeal on the ground of lack of proof of an authorised signatory, without providing an opportunity to rectify the defect, violates principles of natural justice and fair play. It condemned the practice of dismissing appeals based on hyper-technicalities and emphasised that respondent must allow petitioner to demonstrate authorisation before rejecting appeals. Accordingly, Court set aside the impugned order and restored the appeal directing the Commissioner (Appeals) to hear the matter on merits and pass a reasoned order after granting a fair hearing.

95. MeghmaniOrganocem Ltd vs. Union of India

(2024) 22 Centax 388 (Guj.)

Dated: 14th June, 2024

Refund of IGST to SEZ unit on credit received through Input Service Distributor (ISD) cannot be denied under the pretext that only supplier to SEZ is eligible to claim refund under Rule 89(4) of CGST Rules.

FACTS

Petitioner was an SEZ unit engaged in business of chemical manufacturing. It filed an application for refund of unutilised Input Tax Credit (ITC) on exports made without payment of tax under Rule 89(4) of the CGST Rules which was duly granted. However, Commissioner (Appeals) subsequently directed respondent to file an appeal, on the ground that under GST law, only suppliers of goods or services could claim a refund for supplies to SEZ units. Appellate Authority set aside the refund. Aggrieved by such order the petitioner filed an application before Hon’ble High Court.

HELD

Hon’ble High Court held that the petitioner was entitled to a refund of unutilised ITC, applying the principles laid down in the decision of Britannia Industries Ltd. vs. Union of India 2020 (42) G.S.T.L. 3 (Guj.) (pending before Supreme Court). It was held therein that it is not possible for suppliers to file refund claims for supplies to SEZ units under Rule 89 of CGST Rules when an ISD distributes ITC on input services. It further held that the Appellate Authority had erred by ignoring the dictum of law merely on the ground that appeal is pending before Supreme Court, especially where no stay has been granted and, also where the facts in the present case were substantially similar, leaving no basis for a different interpretation. Accordingly, Court quashed the order passed by Appellate Authority and restored the refund sanctioned deciding the matter in favour of petitioner.

96. Prince Steel vs. State of Karnataka

(2024) 24 Centax 314 (Kar.)

Dated: 18th September, 2024

Blocking of Electronic Credit Ledger purely based on report of enforcement authority without providing prior opportunity of being heard does not sustain.

FACTS

Respondent had blocked the electronic credit ledger of petitioner without providing any prior hearing or specific reasons for initiating such a stringent action. Further, the decision to block electronic credit ledger was based solely on the reports received from the Enforcement Authority stating that ITC was fraudulently availed by the petitioner. Being aggrieved by such blocking of electronic credit ledger, hence the petition.

HELD

The Hon’ble High Court held that impugned order blocking petitioner’s electronic credit ledger was violative of principles of natural justice and procedural requirements mandated under Rule 86A of the CGST Rules, 2017. The Court further observed that impugned order lacked independent and cogent reasons to believe that ITC was fraudulently availed or ineligible. Consequently, impugned order was quashed, and respondent was directed to immediately unblocking of the electronic credit ledger.

97. Otsuka Pharmaceutical India Private Limited vs. Union of India

(2024) 24 Centax 141 (Guj.)

Dated: 19th September, 2024

Demand for erroneous refund made alleging violation of Rule 96(10) of CGST Rules cannot sustain for exports made with payment of tax by utilizing imported duty-free goods under Advance Authorisation / EOU Scheme during 23rd October, 2017 to 9th October, 2018.

FACTS

Petitioner was engaged in manufacture and export of pharmaceutical products on payment of IGST by utilising the imported duty-free raw materials against Advance Authorisation during the period from 23rd October, 2017 to 9th October, 2018. Respondent concluded that there was violation of Rule 96(10) of CGST Rules and demanded IGST on the exports made with the payment of tax during 23rd October, 2017 to 9th September, 2018 based on the decision of Gujarat High Court in case of Cosmo Films Ltd. vs. Union of India (2020 (43) G.S.T.L. 577 (Guj.)). Hence a writ petition.

HELD

The Hon’ble High Court held that there was a mistake in the earlier decision of Gujarat High Court in case of Cosmo Films Ltd. vs. Union of India (2020 (43) G.S.T.L. 577 (Guj.)), which was subsequently rectified vide order dated 19th September, 2024 (Cosmo Films Ltd. vs. Union of India (2024) 22 Centax 553 (Guj.)).Therein, it was confirmed that the Notification No. 54/2018-CT restricting export with payment of tax, where the benefit of EOU/Advance Authorisation is taken, would apply prospectively from 9th October, 2018. Therefore, demand made in respect of exports made with payment of IGST during 23rd October, 2017 to 9th October, 2018 was set aside.

Credit Notes under GST

INTRODUCTION:

An invoice is a legal document issued to the customer evidencing the supply of goods or services and generally contains various particulars, such as nature & description of supply, value of supply (taxable & otherwise), applicable tax rate, place of supply, etc. By issuing an invoice, a supplier stakes a legal claim for the value on the customer. Such invoice is recorded in the books of accounts. From a GST perspective, the law does not prescribe a format of the invoice but does list down the minimum particulars expected to be mentioned in the invoice (which is nomenclated as tax invoice). For most of the entities, the GST Law also requires that the particulars of the invoice be submitted to the Government portal for generation of Invoice Reference Number (‘IRN’), which needs to be mentioned in the invoice. The issuance of such tax invoice also triggers liability towards payment of applicable GST. In view of substantial volumes involved, most of the organizations have automated the process of generation of invoice, including the IRN and recording of the same in the books of accounts.

In a practical scenario, post the issuance of the invoice, there could be a need for a change in the particulars of the invoice or cancellation of the invoice already issued. The GST law envisages a possibility of such amendment or cancellation of invoice and prescribes detailed guideline on how to carry out such amendment or cancellation of invoice. Further, there could be situations where subsequent events like discounts or rate differences may cause a need to carry out a downward or an upward adjustment in the value or tax. The GST law suggests that such subsequent events warranting a downward or an upward adjustment in the value or tax be carried out through the issuance of a credit note or a debit note and has prescribed detailed guidelines in this regard.

An earlier article published in February 2024, examined various issues pertaining to credit notes under GST. Certain further developments have warranted an additional article in this regard covering issues which continue to grapple the trade and industry.

CANCELLATION CREDIT NOTES

While the GST law envisages a possibility of such amendment or cancellation of invoice, the IRN portal does not permit an amendment. Even a cancellation of an erroneously uploaded invoice is permitted within 24 hours. Further, most of the invoicing/accounting/ERP systems do not permit a cancellation of invoice already generated. Therefore, it is a common practice that in case of errors in generation of invoice, the cancellation of invoice is effectively carried out through the issuance of a credit note bearing the like amount and tax. As stated in an earlier article, the adjustment of tax on account of issuance of credit notes is governed by the provisions of section 34, which permits a self-adjustment of the tax in specific circumstances and within the prescribed timelines, subject to the incidence of tax not being passed on to the customer. The relevant provision is reproduced for easy reference:

34. Credit and debit notes:

(1) Where one or more tax invoices have] been issued for the supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient one or more credit notes for supplies made in a financial year containing such particulars as may be prescribed.

(2) Any registered person who issues a credit note in relation to a supply of goods or services or both shall declare the details of such credit note in the return for the month during which such credit note has been issued but not later than the thirtieth day of November following the end of the financial year in which such supply was made, or the date of furnishing of the relevant annual return, whichever is earlier, and the tax liability shall be adjusted in such manner as may be prescribed:

Provided that no reduction in output tax liability of the supplier shall be permitted, if the incidence of tax and interest on such supply has been passed on to any other person.

Generally, the cancellation credit notes are unilateral acts carried out by the supplier for erroneously generated invoices. In such cases, it may be possible to argue that such credit notes are indeed covered by the provisions of section 34 since the taxable value or the tax mentioned in the invoice exceeds the taxable value or the tax payable. It can be argued that effectively, no supply is effected against an erroneously generated invoice and hence there is no question of any tax payable on the same. However, disputes could arise in situations where the supply was actually effected against the tax invoice, but later on it is realized that there is an error in the mention of the details of the recipient (Wrong customer selected or Wrong GSTIN of the said customer selected). In such situations, the Department may like to argue that there is no change in the taxable value or tax and therefore the provisions of section 34 are not triggered. In defense, the taxpayer may want to contend that qua the erroneous recipient, there is no taxable supply, value or tax and therefore indeed, qua the erroneous recipient plotted in the invoice, the conditions mentioned in section 34 are indeed satisfied. Since in such situations, another invoice is raised with the correct recipient details, one may want to link the actual supply of goods or services with the fresh invoice so raised. In cases where the error is discovered at a later point of time, this may result in an allegation of delayed generation of invoice. However, this would be an independent allegation from the Department and cannot prejudice the claim of the taxpayer that qua the erroneously generated invoice, indeed there was no supply.

OTHER CREDIT NOTES

Other than the cancellation credit notes issued for erroneously generated invoices, the trade and industry also issue credit notes for passing on discounts. Section 15(3)(b) provides for an exclusion from the value of taxable supply for certain post-supply discounts, subject to the condition of reversal of input tax credit by the recipient. While section 15 deals with the substantive aspect of subsequent exclusion from taxable value and therefore a consequent reduction in the tax liability, the mechanism for self-adjustment of the consequent excess tax continues to be governed by the provisions of section 34. There could also be situations where a supply of goods is actually made but the goods are thereafter rejected by the customer, warranting the issuance of a credit note. Such credit notes are not unilateral credit notes, but bear a visibility vis-à-vis the customer as well. Since the original tax invoice was also available to the customer, it is possible that he may have claimed input tax credit and therefore, the reduction of output tax credit at the end of the supplier is dependent on reversal of input tax credit by the customer. Due to substantial volumes and time-lapse, this dependency on the customer has presented significant challenges to the suppliers. There was no uniform approach adopted by the revenue authorities to satisfy themselves about this condition of reversal of input tax credit by the customer. As an interim measure, the CBIC had therefore clarified that a certificate that the recipient has made the required proportionate reversal of input tax credit at his end in respect of such credit note issued by the supplier may be sufficient evidence to this effect.

CONSEQUENTIAL IMPACT OF CREDIT NOTE ON THE RECIPIENT

While the said Circular to some extent addressed the challenges at the supplier end, the challenges at the recipient end are very different.

When GST was introduced in July 2017, a mechanism of matching transactions between supplier & recipient was proposed whereby the recipient was required to either accept, modify, reject, or keep pending transactions that are reported by the supplier. While the transactions were made available to the recipient in GSTR-2A, the matching mechanism was never implemented which resulted in substantial litigation vis-à-vis claim of input tax credit.

System-generated notices are being issued to the taxpayers alleging non-reversal of input tax credit on credit notes reflected in GSTR-2A, on a generic verification of aggregate data filed by the taxpayer. Such presumption results in needless litigation since the data available with the Department from the aggregate data filed is insufficient to conclude the non-reversal of input tax credit. Some practical examples may be considered:

  1. The recipient reversed the input tax credit on the credit notes by netting off the tax amounts against the fresh input tax credit claimed during the month in Table 4(A)(5) of GSTR-3B In such cases, the reversal is not expressly reflected on the face of the return and therefore, a system generated notice is issued. The taxpayer may respond to the said notice explaining the facts in detail, but at times, the Department is unable to verify the genuineness of the claim since the relevant data is not available in the filings.
  2.  The recipient reversed the input tax credit on the credit notes by reducing it in Table 4(B) in GSTR-3B. In such cases, a co-relation can be established (if there are no other reversals disclosed in GSTR-3B). However, there can be cases of timing difference, i.e., input tax credit on credit note may be reversed in a particular tax period & credit note may be reflected in GSTR-2A in another tax period. Demonstrating such a correlation then becomes challenging.
  3.  The challenges get compounded in case of unilaterally issued cancellation credit notes by the supplier. Since the recipient taxpayer neither has a privy to the erroneous invoice or the cancellation credit note, in all probability, he would not have claimed input tax credit and therefore the need for reversal of input tax credit does not arise. However, at times, the tax officers proceed on a presumption that the recipient has claimed the input tax credit on the invoice and not reversed the ITC on the credit note, based on (a) above, resulting in unwarranted litigation.

INVOICE MANAGEMENT SYSTEM

Recently the Government has introduced the Invoice Management System (IMS) facility on the portal. The invoices and debit notes issued by the supplier and reported in GSTR-1/ e-invoicing facility are transmitted to the recipients’ interim IMS dashboard with an option available to the recipient to either accept such documents, reject them, or keep them pending for action in a subsequent period. However, in the case of credit notes, the recipient is not permitted to keep them pending and is required to either accept or reject them. Accepted documents are transmitted to the recipient’s GSTR-2B while rejected documents are available back to the supplier to take corrective action as deemed fit. Pending documents are
carried forward for action by the recipient in the subsequent tax period. The IMS is optional and in the absence of any action taken by the recipient, all the documents are deemed to be accepted and transmitted to GSTR-2B.

The intention of IMS is to streamline the process of claim of input tax credit at the recipient end and therefore generally does not impact the tax liability of the supplier. However, in the case of credit notes, it is provided that the rejection of the credit note by the recipient will result in automatic additional tax liability (due to non-allowance of self-adjustment) to the supplier. As a corollary, acceptance of the credit note by the recipient will result in automatic reversal of input tax credit at his end.

While the introduction of IMS results in better documentation and control, the prohibitive volumes, the inability of keep action on credit notes pending and the automatic adjustment mentioned above has resulted in a widespread practical difficulty specifically in the context of unilateral cancellation credit notes. Three situations can be examined

ERRONEOUS INVOICE AS WELL AS CANCELLATION CREDIT NOTE REJECTED BY THE RECIPIENT

Since both the erroneous invoice as well as the cancellation credit note were unilaterally issued by the supplier, it is very likely that the documents did not become a part of the accounting records of the recipient, who is more akin to a stranger to such documents. It is therefore fitting that the recipient would reject both the erroneous invoice as well as the cancellation credit note. Interestingly, while the IMS and GSTN Portal provide for an automatic addition of tax liability in case of rejection of credit notes, no such automatic reduction of tax liability is envisaged for rejection of invoices. Therefore, in such situations, the supplier is forced to amend both the erroneous invoice as well as the cancellation credit note to a negligible value and tax.

ERRONEOUS INVOICE KEPT PENDING BUT CANCELLATION CREDIT NOTE REJECTED BY THE RECIPIENT

In view of substantial volumes at the end of the recipient, it may not be possible for the recipient to differentiate cases where the invoice was erroneously raised by the supplier from cases where the supplier has genuinely raised the invoice, but the invoice is pending for processing and/or accounting at the recipient’s end. Therefore, most of the recipients avoid rejection of unmatched records and choose to keep them pending till the end of the timeline available for claim of input tax credit. However, as the credit notes are not permitted to be kept pending, the recipient may reject the credit notes. In such situations also, the supplier is forced to amend both the erroneous invoice as well as the cancellation credit note to a negligible value and tax.

ERRONEOUS INVOICE ACCEPTED BUT CANCELLATION CREDIT NOTE REJECTED BY THE RECIPIENT

Ideally, this situation should not arise since it is not correct on the part of the recipient to accept the erroneous invoice. However, in case of substantial volumes, the recipient may have incorrectly accepted the erroneous invoice (or it could have been deemed to be accepted due to the optional nature of IMS). In most of these situations, the recipient would have temporarily or permanently reversed the credit in GSTR3B. The recipient therefore ends up rejecting the cancellation credit note. At the supplier end, he is again forced to amend both the erroneous invoice as well as the cancellation credit note to a negligible value and tax. However, this situation is slightly more challenging. Since the original erroneous invoice was accepted or deemed to be accepted by the recipient, a downward amendment in the invoice value would be permitted only of such downward amendment is accepted by the recipient. Again, acceptance of such downward amendment results in reduced input tax credit to the recipient, which he will have to compensate by reclaiming the temporarily or permanently reversed input tax credit. In essence, this scenario results in a substantial dependency on the recipient

HOW TO RESOLVE THE SITUATION?

A possible solution to address this issue of dependency would be for the supplier to review the documents before filing GSTR1 to identify erroneous invoices as well as cancellation credit notes and manually remove both documents before uploading the GSTR1. While this will result in a non-alignment of the IRN data and the GSTR1 filings, the same can be explained when the query is raised by the Department. Alternatively, if the erroneous invoice has already been uploaded in an earlier month, the supplier may choose to amend the erroneous invoice in the subsequent month to a negligible value rather than uploading the cancellation credit note. This will substantially reduce the ‘noise’ of voluminous erroneous records being uploaded on the GSTN portal.

CONCLUSION

The emphasis placed by the authorities on demonstrating whether the burden of tax has been passed on to the customer / whether the input tax credit has been reversed on credit notes or not, and the introduction of matching mechanism for credit notes, is resulting in lots of friction for taxpayers, be it from the department perspective or business perspective. The taxpayers should therefore start working on setting up a separate ecosystem for dealing with credit notes from both, outward supply as well as inward supply perspective.

Recent Developments in GST

A. NOTIFICATIONS

i) Notification No.26/2024-Central Tax dated 18th November, 2024

By above notification, extension of time is granted for furnishing of return in Form GSTR 3B for tax payers registered in State of Maharashtra and Jharkhand. The extension was up to 21st November, 2024 for above returns.

ii) Notification No.27/2024-Central Tax dated 25th November, 2024

Above notification seeks to amend Notification No. 02/2017-Central Tax, dated the 19th June, 2017. This notification is regarding powers of Central Tax Authorities and the Table in original notification is substituted.

iii) Notification No.28/2024-Central Tax dated 27th November, 2024

Above notification seeks to appoint common adjudicating authority for Show-cause notices issued by DGGI.

iv) Notification No.29/2024-Central Tax dated 27th November, 2024

By above notification due date for furnishing Form GSTR-3B for the month of October, 2024 for registered persons whose principal place of business is in the State of Manipur, was extended till 30th November, 2024.

v) Notification No.30/2024-Central Tax dated 10th December, 2024

By above notification the due date for furnishing FORM GSTR-3B for the month of October, 2024 for registered persons whose principal place of business is in the district of Murshidabad in the state of West Bengal is extended up to 11th December, 2024.

vi) Notification No.31/2024-Central Tax dated 13th December, 2024

Above notification seeks to appoint common adjudicating authority for show cause notices issued by officers of DGGI.

B. CIRCULARS

Clarifications of amendment in circular – Circular no. 239/33/2024-GST dated 4th December, 2024.

By above circular amendments are done in Circular No. 31/05/2018-GST dated 9th February, 2018 which is about ‘Proper officer under sections 73 and 74 of CGST Act and under IGST Act.

C. ADVISORY

i) Vide GSTN dated 13th November, 2024, information is given about Supplier View of Invoice Management System (IMS).

ii) Vide GSTN dated 12th November, 2024, information regarding IMS during initial phase of its implementation, is given.

iii) Vide GSTN dated 8th November, 2024, information about Waiver Scheme under Section 128A, is given.

iv) Vide GSTN dated 16th November, 2024, information relating to generation of GSTR-2B and IMS, is given.

v) Vide GSTN dated 26th November, 2024, information regarding Reporting of TDS deducted by scrap dealers in October, 2024, is given.

vi) Vide GSTN dated 27th November, 2024, information about Biometric based Aadhaar Authentication and Document Verification for GST Registration Applicants of Madhya Pradesh, is given.

vii) Vide GSTN dated 9th December, 2024, information about difference in value of Table 8A and 8C of Annual Returns FY 2023-24, is given.

viii) Vide GSTN dated 4th December, 2024, information regarding sequential filing of GSTR-7 returns as per Notification No.17/2024, is given.

D. ADVANCE RULINGS

Time of Supply vis-à-vis RCM

Deccan Cements Ltd. (AR Order No. RAJ/AAR/2024-25/08 dated 26th June, 2024 (Raj)

The applicant is a Limited Company incorporated under the Companies Act, 1956 and is in the business of manufacturing and selling of cement in south India having corporate office in Hyderabad. The applicant is having its manufacturing plant in the State of Telangana.

To expand its business activities in manufacturing and trading in cement throughout India, the applicant intended to start manufacturing unit in the State of Rajasthan. For this purpose, the applicant participated in Tender process for E-Auction of mining lease floated by Rajasthan Government.

Applicant is selected as Preferred Bidder and as a Preferred bidder, applicant has to pay some upfront amount as first installment.

Thereafter, the applicant has to pay second installment as upfront amount. Thereafter, the applicant has to furnish performance security for total amount of auction amount.

The performance security amount is to be adjusted every five years as per auction rules. The applicant has then to pay balance amount, where after the Mining lease agreement is entered into with Government of Rajasthan.

With above background, the applicant has raised following questions before the ld. AAR.

“(i) Whether the applicant is liable to pay any GST on the Mining Lease payments (applicability of GST on the Royalty payment of Mining Lease to Government of Rajasthan under Reverse Charge Mechanism).

(ii) If the applicant is liable to pay GST on the above, what will be the applicable rate of GST.

(iii) If GST is applicable, whether the applicant is liable to pay GST on the payment of Upfront Payments as per the Tender Documents which are paid in installments much before issuing LOI and after issuing LOI but before entering in to the Lease Agreement.

(iv) If GST is applicable, whether the applicant can pay GST from the State of Telangana or to apply for registration in the State of Rajasthan and pay GST.

(v) Whether the GST paid is eligible to be claimed as Input Tax Credit or not.”

The applicant was of the view that the lease agreement is entered into only after making all payments and hence it is the time of supply and it becomes liable to RCM at such point of time. The ld. AAR referred to relevant provisions of Act.

Regarding question (1) and (2), the ld. AAR referred to entry at Sl.No.17 of Notification No.11/2017-Central Rate dated 28th June, 2017 as amended from time to time and observed that Licensing services for the right to use minerals including its exploration and evaluation is covered under SAC 997337 and it is subject to levy of GST.

The ld. AAR also referred to Serial no. 5 of Notification No.13/2017-Central Rate dated 28th June, 2017 and observed that the Applicant, being recipient of service, is liable to pay GST under RCM.

The ld. AAR also determined that the applicant is liable to pay GST @ 18 per cent (SCST 9 per cent & CSGT 9 per cent).

Regarding question three about the time of supply, the ld. AAR referred to definition of ‘consideration’ given in section 2(31) of CGST Act.

To determine the time of supply of services, the ld. AAR also referred to Section 13 (3) of the CGST Act, 2017 which stipulates that: –

“In case of supplies in respect of which tax is paid or liable to be paid on reverse charge basis, the time of supply shall be earlier of the following dates:

(a) The date of payment as entered in the books of account of the recipient or the date on which the payment debited in his bank account, whichever is earlier; or

(b) The date immediately following sixty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier.

Provided that where it is not possible to determine the time of supply under clause (a) or clause (b), the time of supply shall be date of entry in the books of account of the recipient of supply.“

The ld. AAR observed that there is difference between advance payment and advance deposit amount. The ld. AAR observed that the advance payment is adjusted towards goods or services or both to be supplied, whereas advance deposit money is received only as security. The ld. AAR further observed that, generally security is not used by the supplier in the course of supply of goods or services but can be forfeited in case of violation of terms and conditions, as mentioned in tender document. The ld. AAR noted that in this case, as per point 13.1 of Tender Document, the upfront payment paid by the Successful Bidder will be adjusted in full at the earliest against the amount to be paid under sub-rule (3) of rule 8 of Auction Rules on commencement of production of mineral, which shows that advance payment made by the Applicant shall be adjusted towards future payments to be made by them.

The ld. AAR also noted that no where there is clause of refund of upfront payment in tender documents after allotment of mines on lease and therefore upfront payment made to the State Govt. is no more deposit but advance which shall be adjusted towards future payments of revenue share amount.

Accordingly, the ld. AAR held that the Applicant is liable to pay GST on the upfront payments made to the State Govt., under Reverse Charge Mechanism (RCM) in terms of Serial No.5 of Notification No. 13/2017-Central Rate Dated 28th June, 2017.

Regarding fourth question, the ld. AAR, referred to section 24 of CGST Act and held that the RCM should be paid in Rajasthan by obtaining registration in said State.

For last question, the ld. AAR held that the recipient will be eligible to ITC subject to fulfillment of conditions of section 16 of CGST Act. The ld. AAR thus disposed of the application.

Government Entity and RCM on Legal Services

THDC India Ltd. (THDCIL) (AR No. 02/2024-25 in Application No.01/2024-25 dated 19th June, 2024 (Uttarkhand)

The facts are that the Applicant i.e. THDCIL is a Public Sector enterprise and registered as a Public Limited Company under the Companies Act, 1956 and has been conferred ‘Mini Ratana-Category-I Status’ and upgraded to Schedule ‘A’ PSU by the Government of India.

The Equity of Company was earlier shared between Govt. of India and Govt. of Uttar Pradesh in the ratio of 75:25. However, pursuant to the strategic sale, the Share Purchase Agreement was executed between NTPC Limited and President of India on 25th March, 2020, for acquisition of legal and beneficial ownership of equity held by the President of India in THDC India Limited and after strategic sale, Equity in THDC India Limited is shared between NTPC Limited and Government of UP in a ratio of 74.496 per cent and 25.504 per cent.

The applicant has to pay legal fees to Advocates including Senior Advocate or Firm of Advocate. Applicant expected exemption from payment of RCM on such legal fees under Entry 45 of the Notification No.12/2017- C.T. (Rate) dated 28th June, 2017.

However, for purpose of legal guidance following questions were raised before the ld. AAR.

“1. Whether the Applicant i.e. the THDCIL is a Government Entity or not?

2. If yes, can Legal Services provided by the advocates including Senior Advocate or firm of Advocate is exempt from GST for THDCIL i.e. THDCIL does not need to pay tax under RCM?”

The ld. AAR held that since at present the equity or control of the Government is less than the stipulated 90 per cent, the applicant cannot be categorized and considered as “Governmental Entity” and cannot be eligible to exemption from payment of RCM.

The prime contention of the applicant was that since before transfer of shares to ONGC, shareholding was between Government of India and Government of UP; it remains Government Company even after change in ratio of shareholding. To support its plea the applicant relied on Uttarkhand AR in case of Application No.11/2018-19 – 2018-VIL-284-AAR.

The ld. AAR referred to Notification No. 31/2017-Central Tax (Rate), dated 13th October, 2017, which amended the Notification No 11/2017 – Central Tax (Rate), dated 28th June, 2017 and defined the “Governmental Entity” as under:

““x. “Government Entity” means an authority or a board or any other body including a society, trust, corporation,

i) set up by an Act of Parliament or State Legislature; or

ii) established by any Government, with 90 per cent. or more participation by way of equity or control, to carry out a function entrusted by the Central Government, State Government, Union Territory or a local authority.””

The ld. AAR analysed the above definition and observed that, to be “Government Entity”, following conditions are to be met and fulfilled independently:

“- must be an authority or a board or any other body including a society, trust, corporation,

– established by any Government,

– with 90 per cent. or more participation by way of equity or control,

– to carry out a function entrusted by the Central Government, State Government, Union Territory or a local authority.”

The ld. AAR further observed that the applicant fulfills the first two conditions i.e. an authority or a board or any other body including a society, trust, corporation, and established by any Government. However, the ld. AAR held that the applicant falls short of fulfilling the third condition, which prescribes, “with 90 per cent. or more participation by way of equity or control,”. The ld. AAR observed that as on the date of filing of the application dated 1st May, 2024 for the present proceedings, the Equity in the applicant company i.e. THDC India Limited is shared between NTPC Limited and Government of UP in a ratio of 74.496 per cent and 25.504 per cent, which is less than the stipulated 90 per cent of equity and therefore, the applicant is not a Government Entity. The ld. AAR observed that earlier status has changed due to change in shareholding ratio. The ld. AAR opinioned that the usage of the word “Government” in relation to any organisation / firm / entity / company, signify and indicate that the Government has a controlling stake (legal power) in the day to day affairs of such organisation / firm / entity / company. It further observed that where the equity holding of the Government is zero, there would not and cannot be any controlling stake (legal power) in the day to day affairs of such organisation / firm / entity / company and in such a case it cannot be said to be a Government Entity.

Classification – “Vanilla Mix”

VRB Consumer Products Pvt. Ltd. (AR No.RAJ/AAR/2024-25/16 dated 31st July, 2024 (Raj)

The facts are that VRB Consumer Products Private Limited, applicant, intends to manufacture and supply dried softy ice cream mix (low fat) in vanilla flavour (“Vanilla Mix”) at its manufacturing unit (factory) located at Plot SP3-7, RIICO Industrial Area, Tehshil Kotputli, Keshwana, Jaipur, in Rajasthan.

The said product contains following ingredients:

The manufacturing process is explained as under:

“a. Procurement of raw materials — Firstly, raw materials such as milk solids, sugar, stabilizers, anti-caking agents etc. will be procured. Upon receipt thereof, applicant will undertake rigorous scrutiny and inspection of such raw materials. Thereafter, the raw materials which will meet the quality standards of applicant than these materials will be stored under appropriate conditions.

b. Mixing of ingredients— The raw materials sourced and stored above will be weighed, sieved and subsequently, mixed with each other in required proportion for the required time and speed in a mechanical mixer.

c. Quality check — The mixture obtained above will thereafter be subjected to sensory evaluation,
metal detection and moisture determination. Mixtures, which will pass the evaluation, shall be proceed ahead for packing.

d. Packing and dispatch– Mixtures, which will be received after a quality check, will undergo the primary packing and thereafter will be packed in cartons. The cartons will, subsequently, be stored in godown from where they will be dispatched after micro-testing.”

The applicant submitted question about correct classification of above product.

The applicant has submitted that Vanilla Mix is liable to be classified under Heading 0404 as mentioned at Sr. No. 10 of Schedule I to Rate Notification, attracting tax @ 2.5 per cent (CGTS, 2.5 per cent SGST).

Applicant interpreted that Heading 0404 seeks to cover within in its ambit, products which consist of natural milk constituents and therefore, so long as any product contains natural milk constituents, it shall be classified under Heading 0404.

The Department submitted to classify the product under heading 2106.

After discussion of submissions of both sides, the ld. AAR observed as under:

“7) In view of above discussion, we find that the product in question i.e. “Vanilla Mix”

– dried softy ice cream mix (low fat) in vanilla flavour comprise of several ingredients

and each ingredient play a vital role in the product. Since this product is intended to use for making of soft serve, each ingredient has a specific role to make the soft serve smooth and creamy in texture. Further, it is also conclusive that not only the contents of the product in question but the processing done in the soft serve machine also play a vital role in giving the smooth and creamy texture characteristic of soft serves.

8) In view of above, we find that the submissions made by the applicant are not enable and the product in question does not fall under the Heading 0404.

9) Further, we find that Chapter 21 of the First Schedule to the Tariff Act covers ‘Miscellaneous edible preparations’ which is clearly distinguishable from “products of animal origin”, the basic difference being the nature of products in question. While Chapter 4 covers products of animal origin which means that the products are normally natural or near to natural in their nature and not much processing has been done thereupon, on the other hand Chapter 21 covers prepared foodstuffs which means that those items of animal origin have been subjected to some processing which and the resultant product has acquired the nature of being prepared foodstuff etc.”

Accordingly, the ld. AAR held that the product i.e. “Vanilla Mix” — dried softy ice cream mix (low fat) in vanilla flavour is classifiable under Heading 2106 90 99 of the First Schedule to Tariff Act attracting tax at the rate of 9 per cent of CGST and 9 per cent of SGST.

E-commerce operator – Scope

Medpiper Technologies Pvt. Ltd. (AR Order No. KAR-ADRG-41/2024 dated 13th November, 2024 (Kar)

The facts are as under:

“5.1 The applicant gets in contract with companies to provide diagnostic labs and wellness services to the employees of the company or any group of people that the company decides, through third-party labs and wellness providers. The contract can be between an insurance company and the applicant to provide the said services to a specific group of people. These employees or groups of people can select a specific date, time and a specific diagnostic and lab tests to be done from diagnostic lab and wellness providers from the list the applicant provides. The medium of interaction between these employees and group of people with the applicant and with diagnostic labs can be through a mobile app developed by the applicant or Whatsapp or e-mail or telephonic conversation. The diagnostic labs will be providing medical reports to these employees or group of people through the medium of their choice.”

Thus, the applicant acts as an aggregator for diagnostics and labs for companies, insurance companies and insurance brokers.

In above background following questions were put for determination before the ld. AAR.

“a. Whether the assesse need to collect GST on the diagnostic and lab services provided through third party diagnostic labs? If yes, Whether GST has to be collected for the whole invoice amount or on the margin on the supply alone and what will be the applicable tax rate and which SAC to be used?

b. Whether TCS needs to be collected?

c. Whether the assesse fall under the definition/meaning of an “Insurance Agent” if invoiced to an insurance company, If yes how is GST applicable? “

The applicant interpreted that, it is E-commerce Operator and not required to collect tax under GST.

It also interpreted that it provides health care services and hence exempted under Notification 12/2017-Centre Tax.

The ld. AAR referred to definitions of ‘E-Commerce’ and ‘E-Commerce Operator’ given in section 2(44) and 2(45) of CGST Act.

The ld. AAR held that as per definitions, the Electronic Commerce Operator (ECO) means any person who owns, operates or manages digital or electronic facility or platform for electronic commerce i.e. for the supply of goods or services or both, including digital products over digital or electronic network.

Noting the process of applicant, the ld. AAR observed that the service is not being provided by the labs to the recipients, through the App / Mobile platform, but through the applicant. The ld. AAR observed that the applicant merely provides the platform for the recipients so as to enable them to select the lab from whom the services are to be procured and once the selection is over, the labs, after the tests, provide the reports directly to the recipients. The invoices are raised by the labs on the applicant. The ld. AAR, therefore held that the applicant doesn’t qualify to be an e-commerce operator.

The ld. AAR also observed that the applicant is neither acting as an agent of the client company to whom the services are provided nor of the diagnostic labs / wellness providers from whom the services are procured, as the applicant is not carrying the business of supply of services on behalf of another party but on his own account.

The ld. AAR also held that the applicant, add mark up on the cost of the services procured from the diagnostic labs / wellness providers and raises invoices on their clients with the marked-up value and in such scenario, the applicant has to charge GST on the whole invoice amount, being the transaction value and not merely on the mark-up value, in terms of Section 15(1) of the CGST Act 2017.

The ld. AAR also examined the contention of applicant that its services are falling in health care services covered by SAC 9993. In this regard the ld. AAR referred to entry number 74 and also paras 2(zg) & 2(s) of the Notification 12/2017-Central Tax (Rate) dated 28th June, 2017 and SAC 9993.

The ld. AAR held that, to avail the said exemption, the following two conditions have to be fulfilled.

“(i) The services being provided must be covered under health care services.

(ii) The service provider must qualify to be a clinical establishment.”

The ld. AAR held that the services being provided by the applicant are covered under healthcare services and held that the first condition is fulfilled.

However, the ld. AAR held that the applicant does not fulfill the second condition as the applicant does not qualify to be “a hospital, nursing home, clinic, sanatorium or any other institution by, whatever name called, that offers services or facilities requiring diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognised system of medicines in India”. Holding so the ld. AAR held that since second condition is not fulfilled, the applicant is not entitled to avail the aforesaid exemption and the applicant is liable to collect GST on the diagnostic and lab services provided through third party diagnostic labs to their clients.

The ld. AAR also held that since the applicant is not an E-Commerce Operator, it is not liable to TCS. The ld. AAR also negated the contention of the applicant as being an insurance agent, since the services provided by the applicant are not connected, not even remotely, with the sale of insurance policies and hence, the applicant does not fall under the definition / meaning of the “Insurance Agent”. The ld. AAR held that the applicant has to raise invoice at par with the other companies.

Accordingly, the ld. AAR held that applicant is liable to discharge GST @ 18 per cent under SAC 9993 without any liability for TCS

Goods And Services Tax

I SUPREME COURT

77 2024-TIOL-121-SC-CX — M/s. Bharti Airtel Ltd. Vs. The Commissionerof Central Excise, Pune
Dated: 20thNovember, 2024

Hon. Supreme Court resolves conflicting interpretation on applicability of CENVAT credit on telecom towers.

FACTS

Appellant operates as a Mobile Service Provider (MSP) by supplying Sim cards to provide wireless telecom services. They usually own and operate infrastructure such as cell towers, Base Transceiver System (BTS) along with accompanying network equipment and structures like PFBs electricity generating sets, battery backup and stabilizers. A separate set of assessees offer passive infrastructure services including towers and incidental equipment to telecom companies at completely various sites. Telecom towers and shelters were fabricated offsite and supplied in a completely Knocked Down Condition (CKD) form and thereafter fastened to civil foundation for operational stability.

CENVAT credit availed on mobile towers as well as Pre-Fabricated Buildings (PFBs) was the centre point of dispute since the Bombay High Court in Bharti Airtel (earlier Bharti Televentures Limited vs. Commissioner of Central Excise, Pune) 2014-TIOL-1453-HC-MUM-ST had ruled against allowing CENVAT credit on the following grounds:

  •  Mobile Towers, their parts and PFBs are not capital goods as they are neither mentioned in Rule 2(a)(A) nor are components, spares and accessories of goods falling under any of the Chapters or Headings of the first Schedule of the Central Excise Tariff Act, 1985 (Tariff Act) and as specified in Rule 2(a)(A).
  •  Further, these items become part of immovable property once they are fastened and fixed to the earth.
  •  Also, these items cannot be construed as ‘inputs’ as these items are immovable, non-marketable and non-excisable goods.

As against the above Delhi High Court in the Vodafone Mobile Services vs. CST Delhi 2019 (27) G.S.T.L. 481 (Del) decided that towers and other associated structures like PFBs are covered by the definition of capital goods and are also ‘inputs’ as defined under CENVAT Credit Rules and hence, MSPs are entitled to CENVAT credit on excise duty paid on installation of mobile towers and PFB.

The decision of both the High Courts were challenged by the aggrieved parties before the Supreme Court.

HELD

Upholding the judgment in the case of Vodafone (supra), Apex Court held as follows:

Mobile Towers and PFBs do not become immovable property by their mere attachment to the earth as it is not intended to be permanent. The attachment is done to only provide support and effective functioning to the antenna. They can be easily dismantled and moved to another place without any substantial damage. Hence they are ‘goods’ and would come within the definition of ‘input’ as defined in Rule 2(k)(ii) of CENVAT Credit Rules. Hence, the Hon. Supreme Court while referring to Gujarat High Court’s decision in Industrial Machinery Manufacturers Pvt. Ltd. vs. State of Gujarat, (1965) 16 STC 380 (Guj), held that towers and PFBs though are themselves not electrical equipment, they are essential for proper functioning of antenna and thus, they are essential for rendering output service of mobile telephony and are inputs.

  • Alternatively, mobile towers and PFBs can be considered as accessory to antenna as they are necessary to provide height and stability to the antenna for ensuring uninterrupted and seamless service to subscribers. Hence they can be construed as accessory to antenna and PFBs which are “capital goods” falling under Chapter 85 of the Schedule to Central Excise Tariff. Thus, they are also “capital goods”.

Accordingly, by ruling that the CENVAT credit of excise duties paid on mobile towers and PFBs is allowed, Hon. Apex Court ended a decade long dispute.

Note: Under GST law, section 17(c) and (d) of CGST Act restrict input tax credit on the construction of immovable property, except for plant and machinery. The definition of “plant and machinery” expressly excludes telecommunication towers. However, it requires to be noted that the said definition of “plant and machinery” is relevant only for section 17(5)(c) and (d). If any goods under question do not become immovable property, this definition of plant and machinery is not required to be referred to. The expression “plant and machinery” is also used in section 16(3), 18(6) and 29(5) of the CGST Act, 2017 without making any reference to immovable property. Hence, though telecom towers are excluded from plant and machinery, they are not implied as “immovable property”. In the scenario, it will be interesting to note that mere exclusion of telecom towers would not affect input tax credit in respect of goods and services not becoming immovable property.

II HIGH COURT

78 [2024] 169 taxmann.com 152 (Kerala) Rejimon Padickapparambil Alex vs. UOI
Dated: 26th November, 2024

Where the assessee inadvertently claimed IGST credit as CGST and SGST credit in GSTR-3B, the mistake being only a procedural error, the order confirming the demand for recovery of such CGST and SGST credit is liable to be set aside. The Hon’ble Court praised the Central Tax Officer who passed favourable order in some other matter involving similar issue for rendering timely and effective justice and emphasised that an expeditious disposal of cases, especially those involving procedural aspects of taxation, is the need of the hour so as to ensure fairness and certainty in tax administration.

FACTS

During the assessment year for the inter-state inward supplies, on which IGST (Integrated Goods and Services Tax) was paid by the supplier, the appellant, instead of showing the IGST component in the eligible credit details in Form GSTR-3B, inadvertently showed the IGST component as nil. Further, the appellant added the bifurcated CGST and SGST components of IGST to the existing figures showing eligible CGST and SGST credit. This resulted in a mismatch between Form GSTR 2A and Form GSTR 3B maintained in relation to the assessee. It is undisputed that the aggregate amount shown as CGST and SGST in GSTR-3B was matching with IGST amount shown in GSTR-2A. The department raised demand towards CGST & SGST ITC treating the same as unavailable credit which was used for payment of output tax of CGST and SGST. The petitioner, relied upon an Order passed by Assistant Commissioner of Central Tax, East Division-6, Bengaluru in identical matter, allowing the credit to the assessee in that case.

HELD

The Hon’ble Court reproduced the favourable order relied upon by the petitioner and acclaimed the said officer for passing such a judicious order and rendering timely and effective justice in our country which is known for its huge backlog of cases. The Hon’ble Court stated that at a time when the justice dispensation system is looking for ways and means to reduce litigation generally (especially in the field of taxation where delays can affect the nation’s economy), orders such as the one extracted above come as a welcome breath of fresh air, and are to be duly appreciated and encouraged. The Hon’ble Court also emphasised that an expeditious disposal of cases, especially those involving procedural aspects of taxation, is the need of the hour so as to ensure fairness and certainty in tax administration. On merits, the Hon’ble Court held that the only mistake committed by the appellant was an inadvertent and technical one, where he had omitted to mention the IGST figures separately in Form GSTR 3A. Accordingly, the demand is liable to be set side. The Court further held that respondent State who may have lost its legitimate share of IGST, may represent before the GST Council and the GST Council shall issue necessary directions to resolve the issue by taking note of the declaration in this judgment.

79 [2024] 169 taxmann.com 24 (Delhi) Xiaomi Technology India (P.) Ltd vs. Additional Commissioner, CGST Delhi West Commissionerate
Dated: 29th October, 2024

Mere allegation of mismatch between GSTR-1 and GSTR 3B cannot be the grounds of invoking Section 74.

FACTS

Petitioner was served with a notice intimating a huge difference between the GSTR 1 and GSTR 3B filed. The department had given many opportunities to the noticee to rebut the allegations, but the noticee had not submitted any documents. The department owing to a doubt of fraud/misstatement, invoked section 74.

HELD

Provisions of section 74 would not be attracted on a mere allegation of mismatch between GSTR-3B and GSTR-1 as said provision would itself be liable to be invoked only if it be alleged that a case of fraud, wilful misstatement or suppression of facts is made out.

80[2024] 169 taxmann.com 22 (Madras) Sri Kaleeswari Stores vs. Assistant Commissioner
Dated: 14th October, 2024

Confirming demand higher than the demand proposed in the SCN for a particular issue would tantamount to travelling beyond the show cause notice which is in violation of Principle of Natural Justice.

FACTS

The petitioner filed its returns for the period 2019-20 and discharged appropriate taxes as self-assessment. An audit was conducted on the petitioner and a show-cause notice was issued proposing demand under the head / defect “GSTR 2A and GSTR 3B (ITC Discrepancies)”, alleging that there is an excess ITC to the extent of ₹97,010/- under the CGST and SGST Act respectively. However, while passing the impugned order of adjudication, the entire ITC claimed during the period was disallowed. There were three more issues in respect of which also the demand was confirmed by the same order.

HELD

As regards to the primary dispute viz. discrepancy between GSTR 2A and GSTR 3B which constitutes 90 per cent of the demand liability, the Hon’ble Court held that the impugned order traversed beyond SCN in violation of natural justice as party was denied opportunity to put forth its case. As regards the other three issues the Hon’ble Court observed that the order records a finding that reply filed by the petitioner was not supported by documentary evidence. In these circumstances, the Hon’ble Court remanded the matter back for adjudication with a direction to the petitioner to deposit tax in respect of the other three issues and file its objections within a period of 4 weeks.

81[2024] 169 taxmann.com 9 (Punjab & Haryana) J.S.B. Trading Co vs. State of Punjab
Dated: 4th November, 2024

Once the proceedings are dropped after a valid conclusion that no tax was payable, reinitiating the same proceedings are bad in law and the impugned order is to be set aside.

FACTS

A notice under section 61 of Punjab CGST/SGST Act, 2017 was issued to the petitioner for scrutiny of the return by the Proper Officer to explain the ITC claimed on certain purchases from four different firms, whose registration had already been cancelled. Therefore, the petitioner was directed to prove the genuineness of the claim regarding ITCs. The petitioner submitted its reply to the notice and was intimated, vide GST ASMT-12 that their reply was found satisfactory and no further action was required in the matter. However, an intimation under Rule 142(1)(A) in Form GST DRC-01A was issued to the petitioner stating that the reply to the notice in Form ASMT-10 was not satisfactory and raised the demand. Hence, this petition.

HELD

The Hon’ble Court observed that the same officer has expressed two different views; one dropping the proceedings under section 61(2) and the other intimating liability. The Court held that once the authority reaches the conclusion that no additional demand was payable, dropping the proceedings, the fresh proceeding after passing of such order, stands vitiated in law and therefore, same is liable to be set aside.

82 (2024) 23 Centax 161 (Del.) A.R. Enterprises vs. Additional Commissioner, Central Goods and Service Tax (Appeals)
Dated: 19th September, 2024

Appellate Authority has the power to condone the delay beyond the permissible time limit of 30 days where delay was due to circumstances beyond the petitioner’s control.

FACTS

Petitioner, belatedly filed an appeal on 16th August, 2023 against order in original received on 27th March, 2023 beyond the stipulated time and also permissible condonation limit. Petitioner attributed the delay to financial hardships as well critical medical condition of their Managing Director requiring bed rest as evidenced by a medical certificate. Appellate authority rejected to admit the appeal on the grounds that it lacked the authority to condone a delay beyond the 30-day period allowed under section 107(4) of the CGST Act, 2017 vide its order dated 8th December, 2023. Being aggrieved by order refusing to allow the appeal by appellate authority, petitioner preferred this writ before this Hon’ble High Court.

HELD

The Hon’ble High Court after considering petitioner’s financial difficulties and Managing Director’s illness as valid and reasonable grounds for the delay. The High Court relied on the case of Central Industrial Security Forces, FGUTPP Unit vs. Commissioner of Central GST and Central Excise,[2018 (14) G.S.T.L. 198 (All.) dated 23rd May, 2018] where it was held that delays caused by circumstances beyond the petitioner’s control should be considered for condonation in the interest of justice by ignoring the limitation aspect. Consequently, impugned order passed by respondent was set aside and remanded back for consideration on merits, by disregarding the limitation period, and after providing an opportunity for a hearing.

83(2024) 22 Centax 575 (A.P.) Apco Arasavalli Expressway Pvt. Ltd. vs. Assistant Commissioner, State Tax
Dated 19th September, 2024

Time of supply for Annuity received for construction and maintenance of a national highway shall be taxable earlier of issuance of invoice or receipt of payments of annuity as per CBIC Circular No. 221/15/2024-GST Dated: 26th June, 2024.

FACTS

Petitioner was engaged in the construction of roads and highways, and entered into a concession agreement with National Highway Authority of India on 18th January, 2018 for construction and maintenance of National Highway No.16 on a Hybrid Annuity Mode (HAM) under design, build, operate, and transfer model. As per agreement, petitioner was to be paid consideration during the construction period and subsequently on an annuity basis for the concession period. While GST on the initial construction payments was settled, a dispute arose regarding the time of supply for GST on the annuity payments. Respondent passed an order stating that petitioner is liable to pay GST on all the annuity installments at the very inception of the concession period which was confirmed by appellate authority on further appeal. Hence, this writ petition. .

HELD

The Hon’ble High Court held that in case of HAM contract, the time of supply shall be as per clarification provided in CBIC Circular No. 221/15/2024-GST dated 26th June, 2024. Accordingly, GST is payable on annuity at the time of invoice issuance or payment receipt, whichever is earlier where invoices are issued prior to completion of milestone as per the agreement and not when concession agreement was entered into. Consequently, the order was set aside, and respondent was directed to collect tax in accordance with the CBIC circular.

84(2024) 22 Centax 132 (Kar.) Bosch Automotive Electronics India Pvt. Ltd. vs. State of Karnataka
Dated 29th July, 2024

ITC claim on GST paid under RCM cannot be denied without considering the clarification issued by CBIC Circular No. 211/5/2024-GST, supporting the timely availment of ITC.

FACTS

Petitioner paid GST under RCM after doing self-invoice on 31st May, 2023 and availed ITC of IGST amounting to ₹3,92,52,317 in respect of manpower supply services received for the period July 2017 to March 2023. Impugned SCN was issued under section 73(1) alleging that the petitioner was ineligible to claim the ITC as there was a delay in taking the credit beyond the stipulated period as specified under section 16(4) of CGST Act, 2017 and the same should be reversed along with interest and penalty. However, petitioner pointed out that CBIC Circular No. 211/5/2024-GST dated 26th June, 2024 was not considered while raising the demand of tax, interest and penalty. Being aggrieved by such impugned SCN, Petitioner filed a writ petition before Hon’ble High Court.

HELD

The Hon’ble High Court observed that Circular No. 211/5/2024-GST dated 26th June, 2024 which supports the claim of petitioner is squarely applicable in the case at hand and hence, no demand can be made on account of belated claim of ITC. Moreover, it relied on the decision of Supreme Court in the case of K.P. Varghese vs. ITO [1981] 7 Taxman 13, AIR 1981 SC 1922 where it was held that CBIC circular is binding upon respondent. Since SCN was issued prior to the release of the aforementioned circular, the Court directed the respondent to consider the objections raised by the petitioner and pass a reasoned order in light of the aforesaid circular. Accordingly, the petition was disposed-off.

85(2024) 23 Centax 76 (Uttarakhand) New Jai Hind Transport Service vs. Union of India
Dated: 27th September, 2024

Value of free fuel provided by service recipient shall not be treated as consideration for providing GTA service and would be included in value of service for charging GST.

FACTS

Petitioner was engaged in business of providing GTA Services. It had entered into a contract where it was agreed between the parties that service recipient will provide free diesel in order to enable petitioner to provide GTA service. However, in order to seek clarification as to whether value of free diesel provided by service recipient would be included in the value of GTA service for the levy of GST, petitioner filed an application for Advance Ruling. However, both AAR and AAAR ruled against the petitioner. Hence, the writ petition.

HELD

The Hon’ble High Court by placing reliance on the decisions of Supreme Court in Commissioner of Service Tax vs. Bhayana Builders Private Limited [2018 (10) G.S.T.L. 118 (S.C.)] and Jayhind Projects Ltd. vs. Commissioner of Service Tax, Ahmedabad [(2023) 13 Centax 32 (S.C.)] where it was held that cost of free diesel provided by service recipient cannot be added to the value of GTA service for the purpose of levying GST as well as providing free diesel cannot be constituted as consideration for rendering GTA service. Accordingly, the petition was disposed of in petitioner’s favour.

86(2024) 22 Centax 576 (All.) — Allahabad High Court Arpit Agarwal vs. State of U.P.
Dated 18th September, 2024.

Proceedings cannot be initiated in the name of partnership firm once it ceases to exist.

FACTS

Petitioner was a partner in a partnership firm consisting of two partners (Arpit Agarwal & Arvind Jain). During the COVID-19 period, Arvind Jain passed away, resulting in dissolution of the partnership firm. The said fact was informed to GST authorities during search operations. However, respondent issued a Show Cause Cum Demand Notice thrice on 16th December, 2023, 19th December, 2023, and 23rd April, 2024. Vide an Order dated 28th April, 2024, tax was confirmed from the partnership which was already dissolved. Being aggrieved by issuance of SCN and subsequently the order confirming tax demand, petitioner filed this writ petition.

HELD

The Hon’ble High Court after perusing section 94 of CGST Act, 2017 observed that once the firm is dissolved, the proceedings with respect to taxes and assessment should be carried out against the partners as well as legal heirs of the partners to the extent of his share. Accordingly, the Court set aside the order in the name of non-existent firm as
the same is nullity in the eyes of law. However, the Court has granted liberty to the respondent to proceed against the petitioner and other legal heirs of deceased partner.

87(2024) 22 Centax 220 (Guj.) Ketan Stores vs. State of Gujarat
Dated: 9th August, 2024

Recovery proceedings and provisional attachment cannot be initiated solely on the basis of Summary Order in Form DRC-07 where order itself was non-existent.

FACTS

Petitioner received a summary of order in Form GST DRC-07 dated 13th August, 2019 confirming demand of ₹94,71,738/- based on mismatch between GSTR 3B and GSTR 2A for the period from April 2018 to September 2018 with reference to an order dated 14th June, 2019. Petitioner stated that there was no such order dated 14th June, 2019, which formed the basis for the summary of order issued in Form GST DRC-07. However, respondent initiated recovery proceedings based on such summary order in Form DRC-07 and provisionally attached the bank accounts of petitioner. Being aggrieved, petitioner filed this writ petition.

HELD

The Hon’ble High Court observed that summary of order dated 13th August, 2019 in Form GST DRC-07 is only for the purpose of quantification of demand and has no value in the eye of law where there was no order itself in existence. Accordingly, High Court quashed summary order dated 13th August, 2019 and the consequent actions for recovery, as well as directed the respondents to lift the attachment of the bank accounts of the petitioner immediately.

Waiver Scheme

Equity and Taxation are considered as aliens to each other. Successive Governments have introduced amnesty, dispute resolution, waiver and / or trade facilitation schemes for benefit of taxpayers. Legal ambiguity, legacy laws, tax augmentation, administrative backlog, etc. have been the primary drivers for such schemes. While every scheme is open to criticism for being detrimental to the interest of tax diligent persons, being a policy decision and beneficial to a litigant class, they have not been challenged on the grounds of equality. However, these optional schemes are subject to strict application of the law, with Courts inclined to examine the intent only in case of any ambiguity in the law. This implies that applicants or cases which are not expressly included in the scheme cannot take shelter under such schemes. One such scheme has been proposed by way of insertion of Section 128A to CGST Act, 2017.

Though the scheme has been understood by many as an ‘amnesty’, it should be appreciated that the scheme neither provides for any haircut in ‘tax payments’, nor does it provide for immunity from prosecution, late fees, redemption fines, etc. The waiver is conditional and limited only towards interest and penalty payable under specific disputes. It would be inappropriate to term this as a ‘dispute resolution’ since the scheme does not preclude the revenue from agitating the matter even on conclusion of the order. Moreover, in case the taxpayer is denied the benefit of the scheme, the taxpayer is entitled to continue with the dispute before appropriate appellate forums and seek remedial action. It would hence be appropriate to classify the scheme as a ‘conditional waiver scheme’, where the waiver is extended to only interest and penalty, subject to the taxpayer discharging the disputed tax and abandoning its right to litigate the said matter.

BROAD CONTOURS

This scheme has been implemented, pursuant to the decision of the 53rd GST Council, by insertion of Section 128A providing for conditional waiver of interest or penalty relating to tax demands raised u/s 73 for the FY 2017-18 to FY 2019-20. Considering the difficulties in initial stages of GST implementation, tax demands pursuant to genuine legal disputes (such as GSTR-2A v/s. 3B difference, rate classification, taxability, etc) are attempted to be settled on full payment of tax reported in the notice or order on or before the notified date1. One cannot seek redressal over the merits of the matter and opting for the scheme does not imply acceptance of the legal proposition canvassed in the dispute. The waiver also does not cover demands of erroneous refund and those pertaining to the tax period from FY 2020-21. Rule 164 has also been inserted prescribing procedures and forms related to the waiver. The CBIC has issued Circular No. 238/32/2024 dt. 15th October, 2024 clarifying many aspects of the scheme.

1 31.03.2025 for S.73 cases and 6 months in cases subsequently converted into S.73

SCOPE OF SCHEME

Section 128A under ‘Chapter 19 — Offences and Penalties’ grants a conditional waiver of interest and penalty on payment of the tax payable arising from the said proceedings in the following situations:

i.Show Cause notice (DRC-01) has been issued u/s 73 and such notice is pending adjudication;

ii. An adjudication order u/s 73(9) (DRC-07) has been issued and no appellate order has been passed against such order;

iii. An appellate order has been passed by the first appellate authority and no further appellate order (second appellate authority onwards) has been passed against the said appellate order.

CONDITIONS OF SCHEME

The above interest and penalty waiver is subject to certain conditions:
i. Full amount of tax payable as per the notice / order is discharged on or before the notified date;

ii. Demands raised u/s 74 (unless converted into Sec. 73 pursuant to a specific appeal) or any other sections2 are not covered under the scheme;

iii. Issue of recovery of erroneous refund is not covered under the scheme;

iv. Appeal / writ petition should be withdrawn on or before the notified date;

v. On favourable conclusion of the scheme, the underlying order cannot be continued in appeal or writ.

2 Section 52, 76, 122, 123, 124, 125, 127, 129 or 130

PROCEDURE FOR AVAILMENT OF SCHEME

The scheme would be implemented through the GSTN Portal and eligible persons would have to follow a defined process:

a) Preparatory Stage

STEP 01: Check the eligibility of the scheme based on the applicable notice/ order (i.e. DRC-01 or DRC-07 or APL-04), period involved and the issues which are covered under the scheme. File a letter with the appropriate authority to upload the said notice / order in case the same is not visible on the electronic portal;

STEP 02: Withdraw the appeal or petition filed by making an application in APL-01W and obtain a withdrawal order from the appropriate authority — one need not await the withdrawal order for proceeding further;

STEP 03: Quantify the tax payment (year wise). Discharge the tax payment in full for the demand quantified in the said demand notice / order vide DRC-03 with appropriate narration of the notice/ demand reference number (including demand for erroneous refund) — exclusion may be made for input tax now available pursuant to introduction of section 16(5);

STEP 04: Once the demand is available on the common portal, apply for mapping the DRC-03 with the relevant demand order uploaded on the common portal with the proper officer in form DRC-03A — verify the mapping of the said payment with demand order in the electronic credit ledger.

b) Application Stage

STEP 05: Where the tax demand is proposed in DRC-01, file an application in SPL01 reporting the details of the DRC-01 and the corresponding tax payments details (if any) in DRC-03;

STEP 05A: Alternatively, in case of confirmed demand u/s 73 or 107 appeal proceedings, an application in SPL02 reporting the corresponding demand order and the tax payment details in Electronic Liability Ledger or DRC-03 & 3A would be reportable;

STEP 06: Upload the self-certified copy of relevant notice / order along with the withdrawal application / order and any order documents (such as order of High Court, communication with officers etc) and establish mapping the tax payment with the demand notice along with application in SPL-01/02.

c) Processing Stage

STEP 07: The officer would issue a notice in SPL-03 in cases where the application is ineligible for the scheme, granting an opportunity for appearance. A response to the said notice in SPL-04 would be submitted;

STEP 08: In case the application is accepted, the officer would issue an order in SPL-05 concluding the proceedings under the scheme. The liability proposed in DRC-01 would be considered as recovered in full and the liability demanded in DRC-07 or APL-04 would be accordingly modified in PMT-01.

d) Redressal Stage

STEP 09: In case the application is rejected3, officer would issue an order in SPL-07 mentioning the reasons for rejection. The said order is subject to appeal u/s 107 before first appellate authority.

STEP 10: In case the tax payer does not file an appeal u/s 107 against the order of rejection (in SPL-07), the original appeal (on merits) would stand automatically restored. In case the matter was pending before the High Court, the petitioner would have to make an application for restoration before the appropriate court.

3 On account of incomplete payment; payment made after the date notified in Section 128A; Notice/ Order pertaining to sections other than section 73; appeal/ writ petition filed before Appellate Authority/ Appellate Tribunal/High Court/ Supreme

e) Post Processing Stage

STEP 11: In case the tax payer files an appeal u/s 107 against the order of rejection (in SPL-07), the ‘128A waiver appeal’ would be examined by the appropriate appellate authority and an appropriate decision would be made. Where such appeal is admitted and allowed, the appellate authority would issue an order in SPL-06 concluding the proceedings and also directing payment of any shortfall in interest or penalty not covered under the scheme. Where the ‘128A waiver appeal’ is dismissed and the appellant decides give-up any further remedy, the ‘original appeal’ on merits would be restored and matter would follow the regular course of appellate remedy on merits.

STEP 12: The conclusion of the proceeding is subject to payment of the demand specified in SPL-05/06 within the specified time frame.

STEP 13: In the eventuality of a rejection order in SPL-07, an appropriate appeal would have to be filed in terms of the appeal provisions u/s 107/112 and in case the appeal is not sought to be preferred at any stage, a declaration may be filed stating its intention so that the appeal on merits stands restored.

f) Restoration Stage

STEP 14: Once the appeal against the wavier order has attained finality, the original appeal on merits would be restorable and the applicant would be permitted to argue the case on merits despite having made the entire tax payment under the scheme. The liability under the Electronic Payment ledger would be maintained as it is.

Particulars Timelines Remarks
Payment of Tax demanded pursuant to notice/ order u/s 73 Notified date 31st March, 2025
Withdrawal of appeal (if any) Before SPL-02 30th June, 2025
Application in SPL-01/02 3 months 30th June, 2025
Rejection notice in SPL-03 3 months from SPL-01/02 Mapped to application
date
Response in SPL-04 1 months from SPL-03 Mapped to SPL-03
Acceptance Order in SPL-05 3 months from SPL-01/02 No SPL-03 cases
3 months from SPL-044 Reply filed in SPL-04
4 months from SPL-033 No reply filed in SPL-04
Rejection order in SPL-07 Same as above3 Same as above
In case of Appeal against SPL-07 3 + 1 months as specified in appellate section 107/112 Regular appeal provisions apply to rejection order
Appellate acceptance in SPL-06 No time limit NA
Appellate rejection in APL-04 No time limit NA
Shortall in payments of tax, interest or penalty 3 months of demand In cases of departmental appeal, revision, etc
128A application for S. 74 notices/ orders which are subsequently converted into S.73 6 months from 73 order and the subsequent sequence of events above would follow suit Pursuant to application of 75(2) appellate/ court proceedings 
4 In cases where the withdrawal order is not uploaded, the time limit from date of application in SPL-02 till the date of filing the withdrawal order would be excluded for purpose closure of the proceedings

Note – If no acceptance order is issued within the timelines for SPL-05, the application would be deemed to be approved and the proceedings are concluded with necessary modifications carried out in the Electronic Liability Register.

PROCEEDINGS EXCLUDED FROM THE SCHEME

The stages of notices or proceedings are excluded if the same are not converted into a proceeding under section 73.

Stages / Forms Covered
ASMT-10 (Scrutiny) No
ADT-01 / ADT-02 (Audit) No
INS-01 (Inspection / Search) No
MOV-09 (E-Way Bill Interception without DRC-01 or DRC-07 u/s 73) No
MOV-09 (E-Way Bill Interception with DRC-01 or DRC-07 u/s 73) Yes
Only Penalty – DRC-01 / DRC-07 u/s 122 only Yes
Only Interest – DRC-01 / DRC-07 u/s 50 only Yes

 

In such scenarios, the taxpayer would have to filter out the frivolous / clarificatory matters through its legal submission and urge the officers to proceed with the matter into adjudication — which typically would be performed u/s 74 in view of the expired time limit of section 73.

FAQS / COMMON QUESTIONS IN RESPECT OF THE SCHEME

Q1 – Can the applicant cherry pick a particular issue or year from within a notice / order for closure u/s 128A?

Pick a particular issue — Section 128A(1) states that the scheme would be available only on full payment of the tax liability under the notice/ order. Since the scheme is designed qua the notice or order, the applicant cannot cherry pick any issue for waiver and seek appellate remedy for the rest. In view of specific wordings, the scheme has been designed for closure of the entire notice / order and there is no window for authorities to conclude the notice / order partially. Even in cases where a particular issue pertains to erroneous refunds, it has been specified in the rules that the applicant would have to settle the tax demands from such erroneous refunds to be eligible for the scheme (Rule 164(3) and Q5 of Circular).

Pick a particular year – Where notices have been issued for a larger assessment period, with the scheme being limited to the first 3 years, one would have to settle the tax, interest and penal liability for the years 2020-21 onwards. Once again, the taxpayer is not permitted (in view of Rule 164(4) r.w. Q6 of Circular) to cherry pick any particular year from among the notice / order period. Taxes for all the years would have to be discharged including those which are not covered under the scheme prior to application of the scheme. To tabulate the above issue:

Consolidated Notice/ Order 2017-18 Apply for scheme
2018-19
2019-20
2020-21 No appellate remedy for next 2 years — consequential tax, interest and penalty to be paid
2021-22
Notice for each year is separately issued 2017-18 Apply for Scheme or choose to appeal
2018-19 – same as above –
2019-20 – same as above –
2020-21 Appeal remedy
2021-22 Appeal remedy

A careful SWOT assessment and numerical analysis of the proceeding would have to be performed to address such dilemma. Alternatively, taxpayer can seek the intervention of the court which have directed the revenue authorities to split the SCNs year wise and permitted the taxpayer to avail the scheme.

Q1A – As a follow-up issue, can applicant seek a direction from the High Court for splitting the issue year-wise or issue-wise and then pick / choose a particular matter for closure under the scheme?

Section 73/74 does not bar the proper officer to consolidate all the tax issues for multiple assessment period in one show cause notice. But courts have recognised that each financial year is a separate assessment unit and hence there does not seem to be much difficulty in obtaining separate notices / orders for each assessment year by a direction from the High Court.

The open-ended wordings of section 73/74 also do not bar multiple issues in one single notice / order. Conversely it does not also bar the proper officer separate the issues in separate notices and consequently separate orders. This leaves the proper officer with significant discretion for adjudication proceedings. Is the discretion at the officer’s end determinative of the eligibility of taxpayer under the scheme? The answer unfortunately appears to be in the affirmative for reasons discussed below.

By now we are aware that Section 128A has been legislated for the notice / order in totality. But if one where to examine the fundamentals of taxability and its recovery through adjudication proceedings, each outward and inward supply stands on its own merits. GST law being a ‘transaction-based tax’, each supply would have to be independently examined for all the taxable aspects (such as taxability, rate of tax, time of supply, place of supply, etc) and hence any short payment or non-payment would be a separate proceeding even if they are contained in a single notice / order. Similarly, availability of input tax credit is also linked to each inward supply and its eligibility (including its usage) is to be analysed on an input invoice basis. Having said this, equity demands that 128A ought to have been designed keeping in perspective this fundamental principle of taxation.

5 Titan Company Ltd. v. Joint Commissioner of GST & Central Excise [2024] 159 taxmann.com 162 (Madras) & Veremax Technologie Services Ltd. & ACT Bengaluru [2024] 167 taxmann.com 332 (Karnataka)

Historically, adjudication proceedings were ‘issue specific’ and notice on a particular issue did not preclude another notice on a distinct issue. Assessments, on the other hand, were ‘period specific’ in so far as the assessment involved conclusion for the assessment year as a whole. The practical experience of adjudication seems to have overtaken the academic essence of assessments and the GST Council / Legislature, have thought it fit in their wisdom (keeping the administrative hurdles) to design the waiver scheme for the adjudication proceeding as a ‘whole’ and refrain from entering into granular aspects. The defence for such an approach would be that optional schemes are the prerogative of the legislature and any grievance on this aspect may not be sustainable even before Constitutional Courts. If one were to invoke the fundamental principles of equity, Courts may treat both the taxpayers (one with a consolidated proceeding vis-à-vis individual proceeding) as unequals from the perspective of adjudicative and administrative procedure, which is the primary bedrock for introduction of this scheme. While an issue wise fragmentation may be tested before Courts, it would defeat the very purpose of even approaching this scheme as it would add another layer of a litigation to a dispute resolution-oriented approach of the taxpayer.

Q2 – Are Section 74 notices / demands totally barred from relief under this scheme?

Section 128A has been designed to grant relief vis-à-vis a specific proceeding and implicitly excludes all other proceedings under the Act. Taxes payable u/s 74 is one such implicit exclusion u/s 128A or rule 164. Considering the grievance of taxpayers who have received SCNs alleging fraud / suppression, etc u/s 74 even on issues of genuine misclassification, numerical discrepancies, legal ambiguity, etc, the scheme has provided for a separate window for clearance of such proceeding.

Section 75(2) provides that in cases where the appellate authority overturns the grounds of fraud/ suppression, etc, the proper officer would have to conclude the proceedings u/s 73(9) within 2 years from appellate order u/s 75(3). The scheme recognises this and extends the waiver even to such scenarios, permitting the taxpayer to apply in SPL-02 subsequent to the revised adjudication order u/s 73 of the Act. In effect, the scheme would come into operation only after the adjudication order u/s 73 is passed in favour of the taxpayer.
Curiously, this mis-action by the department would lead to multiple advantages to the taxpayer:

– Firstly, the taxpayer now possesses the flexibility of applying for the scheme and making the requisite tax payment only after the revised adjudication order u/s 73(9); effectively giving the taxpayer an indefinitely long time period to make the tax payment without any additional interest or penal implications;

– Secondly, the taxpayer also has the opportunity to argue the issues on merits and seek redressal of any patently unsustainable tax demands which would otherwise not be available to an applicant subjected to 73 proceedings on similar issues;

– Thirdly, the taxpayer is also benefited by exclusion of tax demands which are barred by the period of limitation on account of conversion of proceedings from section 74 to 73;

– Fourthly, the taxpayer can advance arguments for splitting a single order into multiple orders and treatment of each of the same independently under the legal provisions;

While the scheme would apply in entirety for recipients of SCNs u/s 73, other applicants who are initially subject to proceedings u/s 74 can avail the scheme at their option after the appellate authority delivers its decision on the grounds of fraud, suppression, etc. Barring cases of circular trading, fake bill cases and tax fraudulently collected, it appears that multiple taxpayers would explore the opportunity to avail the benefit of these scheme at a later point in time, enjoying the interest arbitrage.

Q3 – While the applicant cannot file an appeal, can the department file an appeal or revise an order subsequent to conclusion of under the scheme?

Yes, the scheme functions as a waiver scheme and is limited only to wavier of interest or penalty but does not provide any immunity from assessment/ appeal of the subject period. The conclusion of the proceedings by virtue of SPL05/06 is to the extent of the adjudication process and not further. The revenue can separately initiate proceedings including filing an appeal or revision under the respective sections against the underlying adjudication or appellate order (including SPL-05/06) which has been subjected to the scheme. A particular issue, which was previously dropped or not examined appropriately, can theoretically be agitated in departmental appeal or revisionary proceedings. Unfortunately, the applicant would have to discharge the additional tax quantified under the scheme within 3 months from the date of the enhanced order. Where the applicant believes that the enhancement is not in order, the next appellate remedy would have to be pursued and depending on the outcome, the enhanced tax would be liable to be discharged (Q8. of Circular). The
silver lining would be that the taxpayer would be eligible for the waiver of interest and penalty for the additional tax liability which was demanded by virtue of this process.

Q4 –Can parallel proceedings initiated (either before or after the scheme) abate by virtue of this scheme?

As stated above, the scheme does not place any bar on the department to initiate proceedings on the similar subject matter or any other subject matter. Moreover, the conclusion of the proceeding is not with reference to the merits of the matter, rather only with respect to the adjudicative / appellate process governing the notice / order. For example, an applicant obtains conclusion for an adjudication order (in DRC-07) in respect of numerical differences in input tax credit in GSTR-2A v/s 3B. Pursuant to an inspection or scrutiny proceedings, the tax department discovers that some vendors have failed to discharge their output taxes and have escaped the issue in the original adjudication. Invoking the adjudication powers, fresh notices can be issued against the applicant, and the said proceedings would be independently viewed and cannot be clubbed to be covered / admitted in the original adjudication proceedings. In essence, the department is not precluded from initiating proceedings on the very same issue or rake up fresh issues by virtue of the closure order issued under the scheme. Even if parallel proceedings are underway on similar subject matter by the corresponding administration, the scheme would achieve closure only in so far as the notice / order which has subjected to the scheme and the parallel proceedings would be governed by regular provisions of the Act.

Q5 – Whether appeal should be filed for orders which are anyway being withdrawn as part of waiver scheme?

There are cases (especially for 2019-20) where orders are passed or due to be passed before February 2025. Filing an appeal and withdrawing the same for purpose of application of the scheme may seem a futile exercise. Yet, it is advisable to file the appeal and withdraw on three counts:

(a) the scheme covers cases where an adjudication order has been passed and no appellate order has been passed. The provision does not explicitly state whether an appeal proceeding should be pending as on the date of the application. Though, the condition has been worded in the negative, revenue can very well interpret that pendency of appeal is implicit, since only in such scenarios one can state that an appellate order is due to be passed. To address this technical interpretation, filing an appeal may be an advisable option.

(b) In the eventuality the waiver application is rejected, the scheme mandates that the original appeal in merits (which was withdrawn) would be re-instituted. This presupposes that an appeal was originally filed. The scheme does not in anyway permit fresh filing of appeal (on merits) after rejection of the waiver application. Neither does it grant an exclusion in the time period for the time spent in processing of the wavier application. Thus, in order to protect one’s interest in pursuing the appellate remedy, it would be suitable to file an appeal and subsequently withdraw the same prior to an application before the waiver scheme.

(c) More importantly, the waiver application may take time to process and conclude. Till the time of the favourable conclusion of the waiver application, there is a risk of recovery proceedings being initiated and if such proceedings are initiated, the taxpayer will have no recourse but to knock the doors of the High Court.

Q6 – Who is the proper officer for application of the scheme?

Rule 164 prescribes that the proper officer would be the authority who is under law entitled to recover the tax, interest and penalty arising from the order u/s 79. Where the waiver is in respect of the notice itself, the proper officer would be the officer who has issued the notice u/s 73.

Q7 – Whether the recipient of output invoice is eligible for input tax credit for tax payments under thescheme?

Supplier applicants who have been alleged with short payment of tax are entitled to the scheme on differential output tax paid since the tax paid would be considered as part of proceedings u/s 73. For example, automobile OEM suppliers who have been subject to intense litigation on the applicable rate for parts are considering opting for the scheme and passing on the said
burden to the manufacturers/ dealers for availment of the input tax credit by issuance of a ‘supplementary invoice’. This is possible in B2B transactions as the customer would be eligible for input tax credit and the same would not be barred under the provisions of section 17(5)(i).

Q8 – Whether orders / notices limited to interest or penalty are eligible under the scheme?

Section 128A specifies that notices/ order which report a ‘tax payable’ are eligible for waiver under the scheme. Though this phrase ‘tax payable’ is adopted, the rules and circular indicate that taxes already paid (in part or full) would also be adjusted under the scheme (Q1, 2 & 4 of Circular). Though tax liability is a sine-qua-non for invocation of the rights under the scheme, the tax need not be unpaid as on the date of the scheme. However, the circular makes a mention that ‘self-assessed taxes’ which are paid would not be eligible for the scheme and the interest or penalty would be payable in such scenarios.

CONCLUSION

The scheme clearly has all the ingredients of the experience of the Government administration from earlier amnesty and dispute resolution scheme. Old disputes of mapping tax demands, lack of appellate remedy and restoration, time frame under a quasi-judicial process, etc which were missing in the legacy schemes are eminently visible in this current format. The circular issued by the Government is also progressive and granted the relief to advance the object of the scheme. In the midst of the everlasting debate of equity in such schemes, on may state that the approach of the Government for launching this scheme is fairly commendable.

Goods And Services Tax

HIGH COURT

68 AHS Steels vs. Commissioner of State Taxes

[2024] 168 taxmann.com 150 (Allahabad)

Dated: 15th October, 2024

Post cancellation of GST registration, a show cause notice must be alternatively served to the assessee as he is not obliged to check portal post cancellation.

FACTS

The petitioner’s registration under the Act was cancelled on 18th March, 2019. Subsequent to the same, no business was carried out by the petitioner. It appears that a show cause notice was uploaded on the GST portal and subsequent to the same, the impugned order was passed under section 73 of the Act.

HELD

Once the registration has been cancelled, the petitioner is not obligated to check GST portal. The mode of service of any show cause notice has to be by way of alternative means to the petitioner. Thus, there has been violation of the principle of natural justice, and accordingly, the impugned order passed by the department is quashed and set aside.

69 Crystal Beverages vs. Superintendent,

Range 2, Rohtak

[2024] 168 taxmann.com 62 (Punjab & Haryana)

Dated: 23rd October, 2024

NOC or consent letter from the property owner along with proof of address is required to be produced, only for the purpose of issuing the registration certificate for the principal place of business and once the registration certificate has been issued, merely for adding another place of business there is no requirement under Rule 19 of the GST Rules. If there is a civil dispute between the landlord and the tenant, the State Government or its authorities cannot be expected to take sides or initiate action to benefit one of the parties.

FACTS

The petitioner company obtained GST registration for its principal place of business on 11th July, 2017 under the Central Goods and Services Tax Act, 2017. In February 2019, the registration was amended to incorporate additional place of business informed by the petitioner, which the petitioner had taken on rent from the landlord. The same was approved by the proper officer after due verification without issuance of any memo for deficiency in REG-03.

In December 2023, the respondents visited at the additional place of business for physical verification based on a complaint filed by the landowner, who wanted the petitioner to vacate the premises. It was alleged that the petitioner is operating business from his land without his consent, hence, committed violation of the GST laws. After the inspection, the complaint was reportedly dropped. In May 2024, the respondents again visited the additional place of business on the basis of complaint filed by the landowner and demanded no objection from the landowner for operating the business from the said place.

A letter was issued by the department in May 2024 seeking initiation of cancellation proceedings as consent letter/NOC from the landowner had not been produced which was followed by the order suspending the GST registration and a show cause notice for cancellation of GST registration of the petitioner for the entire business.

HELD

The petitioner’s registration was sought to be cancelled on the ground that the petitioner has contravened section 29(2)(a) of the GST Act, inasmuch as it is alleged that registered person contravened the provisions of the Act and the Rules made thereunder by not producing NOC. However, there is no provision under Rule 8 of CGST Rules requiring to submit NOC or consent letter from property owner along with proof of address at the stage of adding additional place of business. It is only for the purpose of issuing the registration certificate for the principal place of business that the NOC or consent letter from the property owner along with proof of address is required to be produced. Once the same has been done and the registration certificate has been issued, merely for adding another place of business there is no requirement under Rule 19 of the GST Rules. Rule 8 of the GST Rules cannot be read contrary to Rule 19 of the GST Rules. The Court further held that, if there is a civil dispute between the landlord and the tenant, the State Government or its authorities cannot be expected to take sides or initiate action to benefit one of the parties. Such an approach would amount to violation of Article 14 of the Constitution of India as everyone has to be treated equally by the State. If such an approach is permitted, the business of any individual would be affected seriously and without even examining the issue on the civil side as to whether a tenant is required to vacate the premises or not, and the landowner would be able to get the business closed by getting the GST registration cancelled. Holding that the grounds for cancellation cannot be added into the provisions of section 29(2), the Hon’ble Court set aside the impugned order-cum-show cause notice.

70 Imaging Solutions (P) Ltd vs. State of Haryana

[2024] 168 taxmann.com 66 (Punjab & Haryana)

Dated: 22nd October, 2024.

Appeal cannot be rejected as non-maintainable merely on the grounds of short deposit of appeal fees and the Appellant Authority should issue a deficiency memo giving the appellant an opportunity to rectify the defects.

FACTS

While passing order under section 101(1) of the Haryana Goods and Services Tax Act, 2017 read with Central Goods and Services Tax Act, 2017, the Appellate Authority found that the appellant paid ₹10,000/- (₹5,000/- for CGST + ₹5,000/- for HGST) as fee for hearing of the appeal while the appellant was required to deposit a total sum of ₹20,000/- (₹10,000/- for CGST + ₹10,000/- for HGST) as fee. The Authority therefore, rejected the appeal as not maintainable for want of deposition of the requisite fee.

HELD

The Hon’ble Court held that for a reason relating to non-payment of the requisite appeal fee, an appeal cannot be dismissed as not maintainable, and in fact, before the Appellate Authority takes up any appeal, the appellant should be informed of any deficiency and be given a chance to deposit and remove the deficiency, if any. Accordingly, appellant authority was to be directed to hear appeal on merits subject to the appellant depositing remaining amount.

71 Jain Cement Udyog vs. Sales Tax Officer Class-II/ Avato Ward 201 Zone 11 Delhi

[2024] 168 taxmann.com 245 (Delhi)

Dated: 23rd October, 2024.

The second order passed all over again on the issues in the same show cause notice for the same financial year would not sustain.

FACTS

The petitioner was served with a show cause notice for the tax period of July 2018 to March 2019. Those proceedings ultimately culminated in the passing of a final order against which the appellant filed an appeal before the first appellate authority. However, subsequently, another order was issued all over again pertaining to the same tax period and referring to the same original show cause notice dated 30th December, 2020. The petitioner filed an appeal against the impugned order and challenged the validity of the impugned order.

HELD

Hon’ble Court allowed the petition holding that the second order would not sustain.

72 Cable and Wireless Global India Pvt. Ltd. vs. Assistant Commissioner, CGST

(2024) 23 Centax 161 (Del.)

Dated: 26th September, 2024

Refund of ITC cannot be denied on the ground that condition for export of service was not fulfilled merely because payment was received in different branch’s bank account of petitioner.

FACTS

Petitioner was registered under GST having its branches in Mumbai and Delhi. It provided Business Support Services to Vodafone Group Services Limited (VGSL) from its Delhi branch and claimed a refund of unutilized ITC amounting to ₹47,33,053/-. The refund was denied on the ground that payment for the export of services was routed to the petitioner’s Bangalore branch account instead of the Delhi branch alleging that condition for export of services were not fulfilled as required as per section 2(6)(iv) of the IGST Act which was confirmed by Commissioner Appeals. Being aggrieved, petitioner challenged this decision before Hon’ble High Court.

HELD

The Hon’ble High Court held that export of services merely requires payment to be received by supplier of service. Remittance received in different bank account does not affect the supplier’s location. It was further held that respondent was overly technical, and denial of refund would defeat the purpose of refund provisions under GST law. Accordingly, orders rejecting the refund were set aside and matter was disposed-off in favour of the petitioner.

73 BLA Coke Pvt. Ltd. vs. Union of India & Others

(2024) 24 Centax 41 (Guj.)

Dated: 19th September, 2024

Once IGST is already paid on the entire value at the time of import of goods including freight, then IGST cannot be levied separately even if transaction is on FOB basis.

FACTS

Petitioner had imported coking coal for its business purpose under Free on Board (FOB) basis. At the time of clearance of goods for home consumption petitioner paid IGST on total value of goods including the freight. Pursuant to the decision of Hon’ble Supreme Court in case of Union of India vs. Mohit Minerals Pvt. Ltd. (Civil Appeal No. 1390 of 2022), petitioner reversed ITC and filed a refund claim on IGST paid on freight which was eventually granted by jurisdictional officer by passing a reasoned order. Department preferred an appeal against such refund sanctioned which was rejected by respondent on the ground that such benefit is not available to FOB imports. Being aggrieved by such rejection, petitioner preferred this petition before Hon’ble High Court.

HELD

The Hon’ble High Court held that once IGST is paid on the entire transaction value including freight at the time of import of goods, then it is not relevant whether it is a CIF and FOB contract. The Court further relied upon the decisions of Supreme Court in Union of India vs. Mohit Minerals Pvt. Ltd. (Civil Appeal No. 1390 of 2022) and Bombay High Court in M/s. Agarwal Coal Corporation Pvt. Ltd. vs. The Assistant Commissioner of State Tax (Writ Petition No. 15227 of 2023) where it was held that when the notification itself is struck down, the respondent authorities cannot insist for levy of IGST on the amount of ocean freight in case of transaction on FOB basis also. Accordingly, the petition was disposed of in favour of petitioner.

74 Metal One Corporation India Pvt. Ltd vs. Union of India

(2024) 24 Centax 13 (Del.)

Dated: 22nd October, 2024.

Demand of GST on services pertaining to secondment of employees by foreign affiliate to petitioner would not sustain where Circular expressly clarifies that in absence of any invoice raised value of services shall be deemed as nil.

FACTS

Petitioner had entered into employment agreements with the employees of its foreign parent entity in Japan. Accordingly, employees of foreign parent entity were deployed with petitioner. Petitioner made payments to foreign entity but did not raise any invoice for the services provided. Respondent issued show cause notice (SCN) to petitioner on account of non-payment of GST under RCM for import of services pertaining to secondment of employees. Being aggrieved by such SCN demanding tax, petitioner preferred this writ petition.

HELD

The Hon’ble High Court observed that as per the 2nd proviso to Rule 28 of the CGST Rules, where the recipient is eligible for full ITC, the value declared in the invoice shall be deemed to be the open market value of the services provided. The Court further noted that CBIC Circular No. 210/4/2024-GST dated 26th June, 2024 itself clarifies that where no invoice is raised by the related domestic entity for services rendered by its foreign affiliate, the value of such services is deemed to be Nil. Consequently, SCN issued demanding tax, interest and penalty in respect of secondment of employees were futile and hence the writ petition was disposed off in favour of petitioner

75 Hallmark vs. Jammu Kashmir Goods and Service Tax Department

(2024) 23 Centax 19 (J&K and Ladakh)

Dated: 25th September, 2024

Subsequent claim of refund cannot be rejected on the grounds of time bar where original refund application was filed within the prescribed time limit.

FACTS

Petitioner filed a refund application on 8th September, 2020 under the head of excess payment of tax. However, respondent issued a deficiency memo on 23rd September, 2020 whereunder requisite documents were asked to be submitted. Thereafter, petitioner submitted a revised application on 28th September, 2020 along with necessary supporting documents. Once again deficiency memo was issued and refund application was ultimately rejected on 15th October, 2020 on the ground of time-bar without providing any opportunity of being heard. Being aggrieved, petitioner filed this writ petition.

HELD

Hon’ble High Court held that original refund application was filed within the prescribed time limit and subsequent refund claim was in continuation of the original application. It further stated that time limit for refund claim would be determined from the original application filed and not second application claim is not time barred. High Court further emphasized that refund cannot be rejected without giving opportunity to petitioner. Consequently, order rejecting refund claim was set aside and matter was decided in favour of petitioner.

76 Honda Motorcycle and Scooter India Pvt. Ltd. vs. Union of India

2024 (23) Centax 90 (P & H.)

Dated: 23rd September, 2024

Appeal cannot be rejected on account of non-payment of 10 per cent pre-deposit separately where the entire disputed amount was itself paid by petitioner.

FACTS

Petitioner filed an appeal before the appellate authority under section 107 of CGST Act, 2017 and deposited the entire disputed amount. However, the respondent overlooked the payment and denied the appeal on the grounds that petitioner did not deposit the mandatory 10 per cent pre-deposit amount as stated in section 107(6) of CGST Act, 2017. Hence the petitioner preferred this writ petition.

HELD

The Hon’ble High Court held that since the petitioner had already paid the disputed amount in full, it was sufficient compliance of payment of pre-deposit as per section 107(6) of CGST Act, 2017 as there is no requirement for an additional pre-deposit of 10 per cent. Consequently, the High Court directed respondent to hear the appeal on merits.

Recent Developments in GST

A. CIRCULARS

Following circulars have been issued by CBIC, in October 2024.

i) Clarifications regarding scope of “implementation of provisions of sub-sections (5) & (6) in section 16” – Circular no.237/31/2024-GST dated 15th October, 2024.

By above circular, clarifications are given regarding implementation of provisions of sub-section (5) and sub-section (6) in Section 16 of CGST Act. The above provisions are for extension of time for the purposes of Section 16(4).

ii) Clarifications regarding “doubts related to section 128A” — Circular no.238/32/2024-GST dated 15th October, 2024.

By above circular, clarifications are given regarding doubts related to section 128A of CGST Act. Section 128A provides for conditional waiver of interest and penalty in respect of demands pertaining to financial years 2017–18, 2018–19 and 2019–20.

B. ADVISORY

  1.  Vide GSTN Advisory dated 22nd October, 2024, the information is given about updated facilities for registration compliance for buyers of metal scrap through form GST-REG-07.
  2.  Vide GSTN dated 17th October, 2024, additional FAQs about Invoice Management System (IMS) are given.
  3.  The CBIC has issued guidelines for conduct of personal hearings under CGST Act, IGST Act, Custom Act, Central Excise Act and Service Tax Act through video conferencing.
  4.  GSTN has issued Advisory dated 29th October, 2024 giving information about barring of GST Returns on expiry of three years.
  5. GSTN has issued Advisory dated 30th October, 2024 about Biometric-based Aadhaar Authentication and Document Verification for GST Registration Applicants of Ladakh.
  6.  GSTN has issued Advisory dated 5th November, 2024, about Form GST-DRC-03A.
  7.  GSTN has also issued Advisory dated 5th November, 2024 about Time limit for reporting e-invoices on the IRP Portal, lowering of threshold of Annual Aggregate Turnover (AATO) to 10 crores and above.

C. ADVANCE RULINGS

37 Classification – “Baby Carriers with Hip seat”

Butt Baby Enterprise Private Ltd. (AR Order No. 10/WBAAR/2024-25 dated 10thSeptember, 2024 (WB)

The applicant has submitted that it is a company having its head office in West Bengal, and it is engaged in the business of manufacturing and trading of “Baby Carriers with Hip Seat”.

Applicant has raised following questions:

“Q.1: Whether the Products “Baby Carriers with Hip seat” covered by HSN code 63079099 (Other made-up articles, including dress patterns – Other)?

Q.2: If it is not so classified in HSN 63079099 then what would be the correct classification of “baby carriers with hip seat” under the HSN code for GST purposes?”

The applicant explained the nature of product that it provides: in-built mini diaper bag and convertible sling carry bag with five storage pockets, designed to carry infants and toddlers. The product is ergonomically designed to provide support in carrying a baby up to 18 kgs in weight and is typically made from fabric materials combined with other supportive structures.

Applicant also explained the manufacturing process.

Though applicant classified its product under HSN 8715, and charged 18 per cent GST, it wanted correct classification in view of different feedback from market.

Applicant submitted that most of the suppliers engaged in similar products are classifying the items under HSN code 6307 where tax is 12 per cent on value above ₹1,000 and 5 per cent GST on the value not exceeding ₹1,000.

The applicant further submitted that the raw materials used and the characteristics of final product suggest that there is dominating quantity of normal fabrics, narrow woven fabric, foam and mould and hence, it might be more appropriately classifiable under Chapter 63.

The ld. AAR observed that the applicant procures the raw materials like normal fabrics, narrow woven fabric, foam and mold for outward supply of finished goods.

Tariff item 6307 broadly covers following description of goods:

“6307 : OTHER MADE UP ARTICLES, INCLUDING DRESS PATTERNS
6307 – Other made up articles, including dress pattern
630710 – Floor-cloths, dish-cloths, dusters and similar cleaning cloths
630720 – life jackets and life – belts
630790 – Other
63079099- Other”

Looking to the scope of above HSN, the ld. AAR observed that “other made-up articles, including dress pattern” is wide enough to cover the articles like baby carriage with hip seat, and therefore, the ld. AAR opined that above-mentioned item, subject to relevant conditions, would be covered under the Sub-Heading 63079099 in the Heading 6307.

The ld. AAR also observed that goods under Chapter 63 are covered under entry no.224 of Schedule I and entry no.171 of Schedule II of Notification no.1/2017-Central Tax (Rate) dated 28th June, 2017, attracting GST at the rate of 5 per cent and 12 per cent, respectively, as per sale value of the product as not exceeding ₹1,000 or exceeding R1,000, respectively.

38 Classification — “Antioxidant Water”

Saisarvesh (AR Order No. 24/AAR/2024 dated 5th November, 2024 (TN)

Applicant is manufacturing Natural Antioxidant Water with natural Betel Leaf extract and natural Ajwain extract. Applicant is trained from CSIR– Central Food Technological Research Institute and is licensed to do Commercial Production by CSIR.

Copy of Certificate issued by the CSIR for “Paan flavored water” is also produced.

Applicant has raised following questions in its AR application.

“1) “We are using HSN 2202 9920, please confirm which is correct or not correct?

2) We are charging tax @ 12% for the products manufactured from end, confirm which is correct or not correct?”

The applicant explained the manufacturing process with use of raw materials like packaged drinking water, Ajwain seeds, and emulsifiers like propylene glycol, etc.

The ld. AAR observed as under about material and manufacturing process:

“12.2. We find that the Applicant are manufacturer of ANTIOXIDANT WATER with natural BETEL LEAF extract or natural AJWAIN extract besides certain additives. On perusal of the process description for manufacturing the ANTIOXIDANT WATER, furnished by the applicant while filing the Advance Ruling Application and further submissions made during and after the personal hearing, it is noticed that the tender, preferable dark green betel leaves/ Ajwain seeds, after washing and grinding would be subjected to Hydro-distillation and the resultant condensate oil is treated with Sodium Sulphate to remove any water molecule present in the oil to obtain volatile oil. Then this volatile oil is dissolved in propylene glycol to get “Stock Solution A”. By the side, prescribed quantity of Menthol crystals are dissolved in propylene glycol to get “Stock Solution B”. Then the “Stock solution A” and “stock solution B” at certain proportions as approved by the Central Food Technological Research Institute (CFTRI), Mysuru, are mixed and blended with packaged drinking water as per the process know-how approved by the CFTRI. It is also observed from the certificate issued by the CFTRI that the said technical know-how for the manufacture of said ANTIOXIDANT WATER viz “Paan Flavored water” have been demonstrated to the applicant and the applicant was also been provided with adequate training in the unit-operations of the process and licensed to undertake commercial production of
the product.”

The ld. AAR referred to Tariff item 2202 9920 in Custom Tariff Act which reads as “Fruit pulp or fruit juice-based drinks”.

The ld. AAR held that Antioxidant Water manufactured by the applicant does not contain any Fruit Pulp or Fruit Juice and, therefore, classification “2202 99 20” adopted by the applicant is not correct.

The ld. AAR then went on to decide correct classification. The ld. AAR observed that the applicant has used “Betel leaves/Ajwain seeds, propylene glycol, Menthol Crystals dissolved in propylene glycol” as their raw materials in the preparation of stock solutions to be blended with the packaged drinking water. Ld. AAR further noted that one of the ingredients used in the preparation of the product is Menthol, which is found naturally in oils of several plants of ‘Mint’ family such as corn mint and peppermint and it possesses well-known cooling characteristics and a residual minty smell of the oil from which it was obtained.

The ld. AAR also observed that in addition to natural flavour contained in a betel leaf/ajwain seeds, menthol crystals are added to get a flavour and taste of ‘Menthos’ and hence, the product prepared by the applicant is nothing but a ‘flavoured drink’.

The ld. AAR also noted that the CSIR has issued certificate as under:

“This is to certify that the CSIR-Central Food Technological Research Institute, Mysuru, has licensed this Instituted Process Know-how on ‘Paan flavored water’ to M/s. IDYA, No. 88, Canal Road, KG. Colony, Chennai – 600 010 as per an agreement entered into between the parties, on 04th October, 2021.”

Therefore, the ld. AAR concluded that Antioxidant Water manufactured by the applicant is nothing but “Paan flavored water”, and classifiable under HSN 2202 1090 as All goods [including aerated waters], containing added sugar or other sweetening matter or flavoured, and taxable @ 28 per cent, vide entry at Sl. No 12 to Schedule IV of the Notification No 1/2017, Central Tax (Rate) dated 28th June, 2017, and compensation Cess at 12 per cent vide entry at Sl. No. 4 of Notification No 1/2017, compensation Cess (Rate) dated 28th June, 2017.

39 GTA Service — Scope

Globe Moving And Storage Company Pvt. Ltd. (AR Order No. KAR ADRG-39/2024  dated 6th November, 2024 (Kar)

The applicant has raised the following issue for ruling by the ld. AAR.

“Whether the supply of pure service made by our organization, (being a GTA cum-Packing & Moving Company) to or on behalf of a foreign entity unregistered in India (unregistered person), is exempt from charge of GST under Notification No.32/2017-Central Tax (Rate) dated 13-10-2017 (entry number 21A) & IGST Notification No.33/2017-IGST(Rate) dated 13-10-2017 (entry number 22A)?”

The ld. AAR noted the activity of applicant as under:

“The applicant submitted that they are into the business of GTA (Goods Transport Agency) and packing, moving, transportation, customs clearing through CHA and related supporting services; they provide services to the foreign client (unregistered person / entity), who are also in the same line of business, who export the consignments of their customers, intend to relocate to India, for ultimate use/consumption in India on “Door to Door Delivery” basis, by making all customs formalities abroad and collect the entire Door-to-Door delivery charges from their customers in their own country. The foreign client of the applicant avails the services of the applicant in India, as they have no permanent or temporary place of business in India, for “Customs clearance, transportation and related supporting services” for delivering such goods to the place of customer in India. Accordingly the applicant arrange for customs clearance of goods in Indian ports through authorized Customs House Agents and transport the said goods to the ultimate destination in India as per shipping documents and also as per the instructions of their foreign client.”

The applicant sought to know the applicability of the exemption under entry 21A of Notification 12/2017 — Central Tax (Rate) dated 28th June, 2017, as amended. The ld. AAR examined the issue with reference to above entry.

The ld. AAR observed that said entry at sl. No.21A is exclusively in respect of services provided by a goods transport agency to an unregistered person, including an unregistered casual taxable person, other than certain specified recipients. The ld. AAR also observed that the term “goods transport agency” is defined in para 2 (ze) of the above Notification which says that the “goods transport agency” means any person who provides service in relation to transport of goods by road and issues consignment note, by whatever name called. Since the applicant is not issuing consignment note in relation to transport of goods, the ld. AAR did not agree with applicant that it is providing goods transport agency service. The ld. AAR also observed that applicant is providing bundle of services of customs clearance (CHA service), loading & unloading services, port handling, liner fee and destination services in India and hence cannot be covered by exemption under entry number 21A of the Notification No.12/2017-Central Tax (Rate) dated 28th June, 2017.

40 Electronic Commerce Operator vis-à-vis liability to discharge tax

Natural Language Technology Research (AR Order No. WBAAR 14 of 2024 dated 5th August, 2024 (WB))

The applicant is a society registered under the West Bengal Societies Registration Act, 1961 which is a non-profit organisation and engaged as a research and development organisation under the Department of Information Technology & Electronics, Government of West Bengal. It is inter-alia engaged in the development of language tools and technology as well as Online Literary and Linguistic resources, etc.

The applicant, under the direction of the Government of West Bengal, has developed a website and mobile application named “Yatri Sathi Mobile App” (hereinafter, referred to as “the App”). The App was launched on the ONDC platform and is designed as a ride-hailing Software as a Service (SaaS) platform, also categorised as a Mobility as a Service (MaaS) solution. The primary purpose of the App is to facilitate the business transaction of supply of services by connecting customers to the drivers of West Bengal.

With above facts, the applicant has made this application seeking an advance ruling in respect of following questions:

“(i) Whether the applicant falls under the purview of the E-commerce Operator as defined in sec 2(45) of the GST Act?

(ii) Whether the applicant shall be deemed to be the service provider u/s 9(5) of the GST Act read with notification no. 17/2021-Central tax(rate) dated 18th November, 2021 for the Driver services provided by the Driver to the Customer connected by “Yatri Sathi Mobile App”?

(iii) Whether the applicant shall be liable to collect and pay GST on the services supplied by the Drivers (person who subscribed the app) to the Customers (person who subscribed the app) connected through the App considering the Applicant as service provider u/s 9(5) of the GST Act read with notification no. 17/2021-Central Tax (Rate) dated 18th November, 2021?”

To decide the issues, the ld. AAR referred to relevant legal provisions like Notification No. 17/2017 — Central Tax (Rate) dated 28th June, 2017, as amended from time to time. The ld. AAR also noted that as per section 9(5) tax on intra-state as well as inter-state supplies of services by way of transportation of passengers by a motorcab, maxicab, motor cycle, or any other motor vehicle except omnibus is payable by the electronic commerce operator, if such services are supplied through it.

The ld. AAR also noted that prime activity of applicant is to provide services for facilitating business transactions through the “Yatri Sathi” App by way of providing a platform to connect the actual suppliers (cab drivers) and recipients (passengers intending to use the driver’s service).

The ld. AAR also noted that actual terms and conditions governing business contracts of supply such as quality, price, etc., are mutually agreed upon by the user, i.e., the driver and his client / customer, i.e., the passenger who books a ride through the App and by no means applicant is involved either directly or indirectly in supply of services. The ld. AAR noted that the only consideration received by the applicant is the registration and subscription fees that are received from the account holder, i.e., the driver and no other commission or so is received by the applicant from the driver.

In this connection, the ld. AAR also referred to definition of “electronic commerce” given in Section 2(44), “electronic commerce operator” in Section 2(45) and provision of Section 9(5) about taxation of Electronic Commerce Operator. The ld. AAR observed that Section 9(5) brings taxability on “Electronic Commerce Operator” if supplies are through such operator.

The ld. AAR held that the applicant is an Electronic Commerce Operator.

Thereafter, the ld. AAR observed about applicability of section 9(5) to present facts.

The ld. AAR observed that the term “through” in the context of legal interpretation, particularly with respect to provisions like Section 9(5) of the CGST Act, requires a level of involvement or facilitation by the electronic commerce operator. The involvement should be substantial enough to consider the service as being provided via the operator’s platform, for which significant involvement in the processes of booking, payment handling and ensuring service delivery by Electronic Commerce Operator is necessary.

However, after going through various aspects of transaction in the present case like fare determination, payment facilities, invoicing, type of service model and influence over driver service quality, the ld. AAR observed that the business model promulgated by the applicant is unique where it merely connects the driver and the passenger and their role ends on such connection and effectively does not have any control over the subsequent business activities as the App platform does not collect the consideration and has no control over the actual provision of service by the service provider.

Therefore, the ld. AAR concluded that even though the applicant qualifies to be an Electronic Commerce Operator, the supply of services is not made through it, and therefore, the applicant is not liable for discharging of liability.

The ld. AAR, accordingly, decided the AR in favour of the applicant.

41 Body building — Job work

Kailash Vahn Pvt. Ltd. (AR Order No. 19/ARA/2024 dated 23rd September, 2024 (TN)

The applicant is engaged in the field of fabrication and truck body building, wherein independent private customers buy chassis from Chassis manufacturer (also referred to as OEM’s), which is sent to them for the purpose of body building activity of Tipper version Motor vehicle falling under Chapter 87 as a complete motor vehicle. The customer owns the chassis and also owns complete body-built vehicle, and it is registered in RTO in the name of such independent private customer. This activity is regarded as “job work activity” in terms of CBIC Circular No. 52/26/2018-GST dated 9th August, 2018.

The applicant submitted that at present they are charging 28 per cent, treating activity of supply of body as goods under CH 8707 but seeks ruling to treat the said body building activity as Supply of Services attracting 18 per cent GST. Applicant has posed following questions for ruling of ld. AAR.

“1) Whether Applicant can consider the said body building activity as ‘job work activity’ and regard it as ‘Supply of Services’ falling under SAC Code -998881 – ‘Motor vehicle and trailer manufacturing services’ (as per Notification No. 11/2017-CT(Rate), dated 28.6.2017 Sl. No.535).

2) If it is regarded as ‘job work activity’ and ‘Supply of Services’, whether the correct applicable rate of GST, will be at 18% (9 + 9) as applicable under Sl. No.26 (ic) or will it be 18% (9 + 9) as applicable under Sl. No.26 (iv).

3) Or will the activity of body building carried out on chassis belonging to and Supplied by Principal is to be regarded as Supply of goods falling under 8707 – as ‘Bodies (including cabs), for the motor vehicles of headings 8701 to 8705’ attracting 28% (CGST @ 14% + SGST @14%) as per Sl. No. 169 of Schedule IV to the Notification No.1/2017-CT (R) dt.28.06.2017.”

In respect of the above body building activity, the applicant placed on record various documents like Tax invoice, E-way bill issued by OEM for supply of chassis, Temporary registration number issued by local RTO as Goods Carrier in the name of independent private customer, Forms 21, 22 and 22 A (Part 1) issued by OEM in favour of such independent private customer, Insurance taken by independent private customer, Tax invoice issued for body building by the Applicant, etc.

The ld. AAR referred to section 7 of the CGST Act, 2017, which provides for scope of Supply and sub-section 1A of the said Section provides as follows:

“where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.”

The ld. AAR also referred to Schedule II of the CGST Act, 2017, which provides for the list of Activities or Transactions which are to be treated as supply of goods or supply of services. Para 3- Treatment or Process under Schedule II provides as follows:

“Any treatment or process which is applied to another person’s goods is a supply of services”.

The ld. AAR also made extensive reference to Circular no.52/26/2018-GST, dated 9th August, 2018, wherein “bus body building as supply of motor vehicle or job work” is held as providing service as clarified in Para 12.2(b) & 12.3 of said Circular.

The ld. AAR, however, made distinction between the supply of body building activity made to GST-registered persons and the supply of body building activity made to an un-registered person. The ld. AAR held that the bus body building on chassis owned by GST registered customer is Job work, the bus body building on chassis owned by un-registered customer does not amount to job work due to definition of job work provided under Section 2(68) of CGST Act, 2017. With the above analysis, the ld. AAR answered the first question as under:

“that the activity of body building by the applicant on chassis owned and provided by registered customer or un-registered customer both fall under the scope of supply of service and as per the scheme of classification of services merits to be classified at Heading 9988 ‘Manufacturing services on physical inputs (goods) owned by others’ and precisely at Service code (Tariff) 998881 ‘Motor vehicle and trailer manufacturing services’.”

The ld. AAR further held that the bus body building on chassis owned by GST-registered customer amounts to job work, and the bus body building on chassis owned by un-registered customer does not amount to job work.

However, the ld. AAR held that the rate of tax in both the cases, i.e., when chassis is provided by the GST-registered person or when chassis is provided by GST un-registered person, would be 18 per cent, as per Entry No.26(ic) and Entry No.26(iv), respectively, of the CGST Notification No.11/2017 CT(R), dated 28th June, 2017.

The ld. AAR also felt that there is no need to answer question 3 as it does not exist in view of above answer to questions (1) and (2).

Analysis of the Decision of the Supreme Court in Safari Retreats

BACKGROUND

The Odisha High Court, in the case of Safari Retreats Private Limited vs. CCCGST1 applied the Apex Court decision in Eicher Motors Ltd vs. UoI2 and held that Section 17(5)(d) was to be read down and purported that the very purpose of ITC was to benefit the assessee. It was held that the narrow interpretation given by the Department to Section 17(5)(d) would frustrate the very object of the Act. The petitioners before the Odisha High Court had claimed ITC for setting it off against rental income arising out of letting out a shopping mall. The Supreme Court, on appeal by the Revenue, pronounced its landmark verdict in the case of CCCGST vs. Safari Retreats Private Limited3.

ANALYSIS OF RELEVANT SECTIONS OF THE CGST ACT, 2017

GST is to be levied on supplies of goods or services or both4.There exist certain categories where the tax on the supply of goods or services or both shall be paid on a reverse charge basis by the recipient5. Only a registered person can avail ITC6. Availability of ITC is subject to certain conditions and restrictions as prescribed by the Act or its Rules. Section 16 (1) provides that a registered person is entitled to take credit of the input tax charged on any supply of goods or services or both to him, which are used or intended to be used in the course of or in furtherance of his business. 16(2) prescribes certain conditions to avail ITC. Section 16(4) was amended in 2022, and the new Section provides that a registered person can avail of ITC in respect of any invoice or debit note for the supply of goods or services before the 30th day of November following the end of the financial year to which such invoice or debit note pertains, or furnishing of annual return, whichever is earlier. Section 17 deals with apportioned and blocked credits, and Section 17(5) enumerates items where ITC is blocked.

1. (2019) 25 GSTL 341 
2. (1999) 106 ELT 3 (SC)
3. 2024 SCC OnLine SC 2691
4. Section 9(1)
5. Section 9(3),(4)
6. Section 16(1)

The two provisions that have been thoroughly analysed by the Supreme Court are:

17(5)(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

17(5)(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

Explanation.- For the purposes of clauses (c) and (d), the expression “construction includes re-constructions, renovation, additions, or alterations or repairs, to the extent of capitalisation, to the said immovable property;……

Explanation.- For the purposes of this Chapter and Chapter VI, the expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes-

(i) land, building or any other civil structures;

(ii) telecommunication towers; and

(iii) pipelines laid outside the factory premises.

The Hon’ble Supreme Court, while breaking down the provisions contained in Section 17(5)(c) and (d), observed, “There are two exceptions in clause (d) to the exclusion from ITC provided in the first part of Clause (d). The first exception is where goods or services or both are received by a taxable person to construct an immovable property consisting of a “plant or machinery”. The second exception is where goods and services or both are received by a taxable person for the construction of an immovable property made not on his own account.”

The Supreme Court observed in Para 34 that “There is hardly a similarity between clauses (c) and (d) of Section 17(5) except for the fact that both clauses apply as an exception to sub-section (1) of Section 16. Perhaps the only other similarity is that both apply to the construction of an immovable property. Clause (c) uses the expression “plant and machinery”, which is specifically defined in the explanation. Clause (d) uses an expression of “plant or machinery”, which is not specifically defined.”

It is important to note that the Explanation clause to Section 17 defines the expression ‘plant and machinery’ but there has been no definition provided for the term ‘plant or machinery’. The Court further summarised the sections stating that ITC is not excluded altogether; if the construction is of plant or machinery under (d), ITC will be available.

The Supreme Court at Para 39 made an interesting summary, which is given below:

(i) Any lease, tenancy, easement, or licence to occupy land is a supply of services. Clause 2(a) is not qualified by the purpose of the use. But the sale of a land is not a supply of service;

(ii) Any lease or letting out of buildings for business or commerce, wholly or partly, is a supply of services. Clause 2(b) will not apply if the lease or letting out of a building is for a residential purpose;

(iii) Renting of an immovable property is a supply
of service;

(iv) Construction of a complex, building, civil structure, or a part thereof, including a complex, building, or civil structure intended for sale to a buyer, wholly or partly, is a supply of service. However, the construction of a complex, building or civil structure, referred to above, is excluded from the category of supply of service if the entire consideration for sale is received after issuance of the completion certificate, wherever required or its first occupation, whichever is earlier. Broadly speaking, if a building or a part thereof to which clause 5(b) is applicable is sold before it is ready for occupation, the construction thereof becomes a supply of service. Therefore, if a building is sold by accepting consideration before issuance of a completion certificate or before its first occupation, whichever is earlier, the construction thereof becomes a supply of service;

The Court also looked into MohitMinerals7 and observed that ITC is a creation of the legislature. It is possible to add as well as exclude specific categories of goods or services from ITC, and such exclusion will not defeat the object of the Act.

7. (2022) 10 SCC 700

PLANT OR MACHINERY

It was observed that the phrase ‘plant and machinery’ appears in various places in the Legislation, but ‘plant or machinery’ appears only in Section 17(5)(d). It was contended by the revenue that the use of the word ‘or’ was a legislative error, but this argument was dismissed on the ground that this being a six-year-old writ petition, the legislature could have stepped in any time to correct this. Seeing as this was not done, it is arrived at that the use of the word ‘or’ is intentional. Doing otherwise would defeat legislative intent. While observing the wording of (d), it was held that while interpreting taxing statutes, it is not a function of the Court to supply the deficiencies.

It was observed that according to the term ‘plant or machinery’, it can be either plant or machinery. Observing that the expression “immovable property other than ‘plants or machinery’ is used leads to the conclusion that there could be a plant that is an immovable property, and seeing that it is not defined by the Act, its ordinary meaning in commercial terms will have to be attached to it.

Relying on Commissioner of Central Excise, Ahmedabad vs. Solid and Correct Engineering Works & Ors.8, where one of the questions examined by the Tribunal was whether plants so manufactured could be termed as good. The Court applied the movability test by holding that the setting up of the plant itself is not intended to be permanent at a given place. The plant can be removed or is indeed removed after the road construction or repair project is completed.

8  (2010) 5 SCC 122

Another decision referred to was CIT, Andhra Pradesh vs. Taj Mahal Hotel, Taj Mahal Hotel, Secunderabad9.The issue before the Court was whether sanitary fittings and pipelines installed in the hotel constituted a ‘plant’ within the meaning of Section 10(5) of the Income- tax Act, 1922. The Court held as under, “6. Now it is well settled that where the definition of a word has not been given, it must be construed in its popular sense if it is a word of everyday use. Popular sense means “that sense which people conversant with the subject-matter with which the statute is dealing, would attribute to it” “9. If the dictionary meaning of the word plant were to be taken into consideration on the principle that the literal construction of a statute must be adhered to unless the context renders it plain that such a construction cannot be put on the words in question — this is what is stated in Webster’s Third New International Dictionary:

Land, buildings, machinery, apparatus and fixtures employed in carrying on trade or other industrial business….”

9  (1971) 3 SCC 550

In CIT, Trivandrum vs. Anand Theatres10, the issue was whether a building which is used as a hotel or cinema theatre can be considered as apparatus or a tool for running a business so that it can be termed as a plant. It was held that –“67. In the result, it is held that the building used for running of a hotel or carrying on cinema business cannot be held to be a plant because:

(1) The scheme of Section 32, as discussed above, clearly envisages separate depreciation for a building, machinery and plant, furniture and fittings etc. The word “plant” is given inclusive meaning under Section 43(3) which nowhere includes buildings. The Rules prescribing the rates of depreciation specifically provide grant of depreciation on buildings, furniture and fittings, machinery and plant and ships. Machinery and plant include cinematograph films and other items, and the building is further given meaning to include roads, bridges, culverts, wells and tubewells.

(2) In the case of Taj Mahal Hotel [(1971) 3 SCC 550 : (1971) 82 ITR 44], this Court has observed that business of a hotelier is carried on by adopting building or premises in suitable way. Meaning thereby building for a hotel is not an apparatus or adjunct for running of a hotel. The Court did not proceed to hold that a building in which the hotel was run was itself a plant; otherwise, the Court would not have gone into the question of whether the sanitary fittings used in bathroom was plant.”

10  (2000) 5 SCC 393

FUNCTIONALITY TEST

Laying down the functionality test, the Court held that whether a building is a plant is a question of fact. “The word ‘plant’ used in a bracketed portion of Section 17(5)(d) cannot be given the restricted meaning provided in the definition of ‘plant and machinery’, which excludes land, buildings or any other civil structures. Therefore, in a given case, a building can also be treated as a plant, which is excluded from the purview of the exception carved out by Section 17(5)(d) as it will be covered by the expression ‘plant or machinery’. We have discussed the provisions of the CGST Act earlier. To give a plain interpretation to clause (d) of Section 17(5), the word ‘plant’ will have to be interpreted by taking recourse to the functionality test. “Further observing that the High Court in the main appeal had not decided whether the mall in question will satisfy the functionality test of being a plant, the Court held that the case should be sent back to the High Court to fact find and apply the functionality test so that it can be termed as a plant as per Section 17(5) (d). It held that each case would have to be tested on merits as the question of whether an immovable property or a building is a plant is a factual question to be decided.

CONSTITUTIONAL VALIDITY

Referring to this Court’s judgement in Union of India &Ors vs. VKC Footsteps India Pvt. Ltd11, where the following principles were set out:

(i) The precedents of this Court provide abundant justification for the fundamental principle that a discriminatory provision under tax legislation is not per se invalid. A cause of invalidity arises where equals are treated as unequally and unequals are treated as equals. Both under the Constitution and the CGST Act, goods and services and input goods and input services are not treated as one and the same, and they are distinct species.

(ii) In enacting such a provision, the Parliament is entitled to make policy choices and adopt appropriate classifications, given the latitude which our constitutional jurisprudence allows it in matters involving tax legislation and to provide for exemptions, concessions and benefits on terms, as it considers appropriate.

(iii) Selecting the objects to be taxed, determining the quantum of tax, legislating for the conditions for the levy, and the socio-economic goals which a tax must achieve are matters of legislative policy.

(iv) In matters of classification involving fiscal legislation, the legislature is permitted a larger discretion so long as there is no transgression of the fundamental principle underlying the doctrine of classification.

11  (2022) 2 SCC 603

The Court also referred to Union of India vs. Nitdip Textile Processors Pvt Ltd. (2012) 1 SCC 226, CCT vs. Dharmendra Trading Co (1988) 3 SCC 570, Elel Hotels & Investments Ltd. vs. Union of India (1989) 3 SCC 698, Spences Hotel Pvt Ltd vs State of West Bengal (1991) 2 SCC 154. Specifically, paraphrasing this paragraph from Nitdip Textiles:

“66. To sum up, Article 14 does not prohibit reasonable classification of persons, objects and transactions by the legislature for the purpose of attaining specific ends. To satisfy the test of permissible classification, it must not be ‘arbitrary, artificial or evasive’ but must be based on some real and substantial distinction bearing a just and reasonable relation to the object sought to be achieved by the legislature. The taxation laws are no exception to the application of this principle of equality enshrined in Article 14 of the Constitution of India. However, it is well settled that the legislature enjoys very wide latitude in the matter of classification of objects, persons and things for the purpose of taxation in view of inherent complexity of fiscal adjustment of diverse elements. The power of the legislature to classify is of wide range and flexibility so that it can adjust its system of taxation in all proper and reasonable ways. Even so, large latitude is allowed to the State for classification upon a reasonable basis and what is reasonable is a question of practical details and a variety of factors which the court will be reluctant and perhaps ill-equipped to investigate.”

The Court, while determining the constitutional validity of the said provisions, noted that essentially, the challenge to constitutional validity is that, in the present case, the provisions do not meet the test of reasonable classification, which is a part of Article 14 of the Constitution of India. To satisfy the test, there must be an intelligible differentia forming the basis of the classification, and the differentia should have a rational nexus with the object of legislation. It was observed that “By no stretch of the imagination, clauses (c) and (d) of Section 17(5) can be said to be discriminatory. No amount of verbose and lengthy arguments will help the assessees prove the discrimination. In the circumstances, it is not possible for us to accept the plea of clauses (c) and (d) of Section 17(5) being unconstitutional.

Summarising their findings, the Court held that:

(i) The challenge to the constitutional validity of clauses (c) and (d) of Section 17(5) and Section 16(4) of the CGST Act is not established;

(ii) The expression “plant or machinery” used in Section 17(5)(d) cannot be given the same meaning as the expression “plant and machinery” defined by the explanation to Section 17;

(iii) The question of whether a mall, warehouse or any building other than a hotel or a cinema theatre can be classified as a plant within the meaning of the expression “plant or machinery” used in Section 17(5)(d) is a factual question which has to be determined keeping in mind the business of the registered person and the role that building plays in the said business. If the construction of a building was essential for carrying out the activity of supplying services, such as renting or giving on lease or other transactions in respect of the building or a part thereof, which are covered by clauses (2) and (5) of Schedule II of the CGST Act, the building could be held to be a plant. Then, it is taken out of the exception carved out by clause (d) of Section 17(5) to sub-section (1) of Section 16. Functionality tests will have to be applied to decide whether a building is a plant. Therefore, by using the functionality test, in each case, on facts, in the light of what we have held earlier, it will have to be decided whether the construction of an immovable property is a “plant” for the purposes of clause (d) of Section 17(5).

GOING FORWARD

Now that the Apex Court has decided on the issue, does it mean that the issue is closed once and for all? Not at all. The Odisha High Court has to decide by applying the functionality test, and that decision may be carried further in an appeal to the Supreme Court. Across the country, disputes at various levels would be decided by applying the functionality test. Given the fact that the Supreme Court has also said that the eligibility or otherwise would depend upon the facts and the test being met is indicative of the fact that there would be significant litigation across the country. A few scenarios are discussed below with reference to eligibility based on the decision.

SCENARIO 1

Can a developer of a mall claim ITC on the procurement of goods or services used for the construction of the mall?

The petitioners before the Odisha High Court were engaged in constructing shopping malls for the purpose of letting out to numerous tenants and lessees. The Supreme Court, in para 53 of the judgement, has held that “As discussed earlier, Schedule II of the CGST Act recognises the activity of renting or leasing buildings as a supply of service. Even the activity of the construction of a building intended for saleis a supply of service if the total consideration is accepted before the completion certificate is granted. Therefore, if a building qualifies to be a plant, ITC can be availed against the supply of services in the form of renting or leasing the building or premises, provided the other terms and conditions of the CGST Act and Rules framed thereunder are fulfilled.”

In light of the above, a developer of a mall can claim ITC on goods or services used for the construction of the mall, provided that the mall is intended to be let out to various tenants.

SCENARIO 2

Can a manufacturer claim ITC on goods and services procure for putting up a factory, building or warehouse?

The Supreme Court has opened a window in the context of Section 17(5)(d) since the Explanation cannot be applied as per the law laid down by the Supreme Court. Therefore, if the manufacturer can demonstrate that the factory, building, or warehouse constitutes a ‘plant’ for his operations or business, a claim can be made and tested in Courts. Various precedents on ‘plant’ under the Income-tax Act, 1961 can act as a double-edged sword. While the functionality test has been extended to the term ‘plant’ by the Supreme Court by drawing reference from Income-Tax decisions, all decisions under the Income-tax Act, 1961 need not be necessarily favourable. In fact, there are a number of decisions which have held that a building will not qualify as a plant. However, one also has to remember that the decisions in the Income-tax Act, 1961 are in the context of ‘plant’ with reference to depreciation or investment allowance and the Courts while deciding the issue, were conscious of the fact that ‘building’ was a separate species of assets for the purpose of depreciation. The manufacturer may have to demonstrate that based on the interpretation given by the Supreme Court, even a building would qualify as a plant, and thus, the factory, building, or warehouse should be treated as a ‘plant’ for the limited purpose of claiming ITC.

CONCLUSION

The Supreme Court has given a new lease of life to Section 17(5)(d) by delinking it from Section 17(5)(c). Each claim of ITC will have to be tested based on the law laid down by the Apex Court. Under the Income-tax Act, almost all decisions on whether an expenditure is a revenue expenditure or capital expenditure would begin with the premise that it depends on the facts and circumstances of each case. Future decisions on the claim of ITC under Section 17(5)(d) are likely to have the same premise.

Goods And Services Tax

I SUPREME COURT

59. Chief Commissioner of Central Goods and Service Tax vs. Safari Retreats (P.) Ltd.

[2024] 167 taxmann.com 73 (SC)

Dated: 3rd October, 2024

The term “plant or machinery” in section 17(5)(d) is distinct from “plant and machinery” in section 17(5)(c) and explanation, and hence, in absence of statutory definition, the word “plant” will be interpreted in its ordinary meaning in commercial terms. Consequently, whether a building qualifies as a plant depends on its role in the business and the “functionality test”. The Court upheld the constitutional validity of sections 17(5)(c), 17(5)(d), and 16(4) of the CGST Act.

FACTS

In this case, the issue before the Court was whether restrictions on ITC contained in section 17(5)(d) are applicable to the construction of immovable property intended for letting out on rent and whether provisions of sections 17(5)(c) and 17(5)(d) are violative of Articles 14 and 19(1)(g) of the Constitution of India. There was also challenge made to provisions of section 16(4) of the CGST Act.

HELD

The Court held as under:

(a) The challenge to the constitutional validity of sections 17(5)(c) and 17(5)(d) and section 16(4) is not upheld. This appears to be done to ensure the object of not encroaching upon the State’s legislative powers under Entry 49 of List II. Therefore, it is not possible to accept the submission that the difference is not intelligible and has no nexus with the object sought to be achieved.

(b) The right of ITC is conferred only by the Statute; therefore, unless there is a statutory provision, ITC cannot be enforced. It is a creation of a statute, and thus, no one can claim ITC as a matter of right unless it is expressly provided in the statute.

(c) The expression “plant or machinery” used in section 17(5)(d) cannot be given the same meaning as the expression “plant and machinery” defined by the explanation to section 17. The cases covered by clauses (c) and (d) of section 17(5) are entirely distinct from the other cases.

(d) The question as to whether a mall, warehouse or any building other than a hotel or a cinema theatre can be classified as a plant within the meaning of the expression “plant or machinery” used in section 17(5)(d) is a factual question which has to be determined keeping in mind the business of the registered person and the role that building plays in the said business. The “functionality test” will have to be applied to decide whether a building is a plant. If the construction of a building was essential for carrying out the activity of supplying services, such as renting or giving on lease or other transactions in respect of the building or a part thereof, which are covered by clauses (2) and (5) of Schedule II of the CGST Act, the building could be held to be a plant. Then, it is taken out of the exception carved out by clause (d) of section 17(5) to sub-section (1) of section 16. Hence the matter is remanded back to the High Court to determine whether the mall in question qualifies as a ‘plant’ or otherwise and to also determine the application of restrictions under section 17(5)(d).

II HIGH COURT

60. Commissioner of Central Tax, GST, Delhi (West) vs. Adesh Jain

(2024) 22 Centax 328 (Del.)

Dated: 30th August, 2024

Departmental Custody beyond the period of 60 days is unlawful where no complaint was filed against accused.

FACTS

Respondent was arrested with an allegation of his involvement in generating fake invoices and passing on ITC without actual supply of goods. Respondent had applied for bail which was granted by the Chief Metropolitan Magistrate (‘CMM’), Patiala House Courts, New Delhi. On further challenge by petitioner before Additional Sessions Judge, Patiala House Courts, New Delhi denied the bail granted to respondent. Investigation was neither completed nor any complaint was filed even after a lapse of 60 days. Consequently, respondent applied for statutory bail under section 167(2) of CrPC, which was granted. Being aggrieved by the order granting bail, petitioner preferred this writ petition before this Hon’ble High Court.

HELD

High Court in its observation expressed shock at the approach and rationale behind petitioner challenging the bail granted, especially where even though grave allegations pertaining to tax evasion and fake invoicing are made still no complaint is filed beyond 60 days of custody. Court further held that petitioner was not interested in reaching to a logical conclusion but was only interested in keeping respondent under custody. Accordingly, petition was meritless and dismissed and matter was decided in favour of respondent.

61. Krishna Chaurasia vs. Additional Director General, Directorate General of GST Intelligence

(2024) 23 Centax 73 (Del.)

Dated: 6th September, 2024

Seizure of cash during GST search operations is without authority of law. The same ought to be returned with interest.

FACTS

Respondent during search operations found cash of ₹27,00,000. On inquiry with respect to source of cash, petitioner did not provide satisfactory explanation about the same, and hence, respondents seized ₹27,00,000. Being aggrieved, petitioner preferred this writ petition before High Court, challenging the legality of seizure of cash.

HELD

Respondent accepted and agreed with the submissions made and reliance placed by petitioner in the case of Deepak Khandelwal Proprietor M/s. Shri Shyam Metal vs. Commissioner of CGST, Delhi West &Anr. 2023:DHC:5823-DB where it was held that cash cannot be seized during search. Accordingly, the High Court directed that the seized cash, which had been placed in a fixed deposit account, be returned to the petitioner along with accrued interest, and thus, writ was allowed.

62. Elitecon International Ltd. vs. Union of India

(2024) 22 Centax 549 (Bom.)

Dated: 5th September, 2024

Order for provisional attachment of bank account under section 83(1) of CGST Act, 2017 does not sustain where no reasons were recorded for forming an opinion.

FACTS

Respondent passed an order of provisional attachment under section 83(1) without recording any reasons. Further, copy of the original file also does not even contain any reasons for forming an opinion being essential for the purpose of protecting interest of the Government revenue. Being aggrieved by such an order, petitioner preferred this petition before the Hon’ble High Court.

HELD

The High Court held that the language of section 83(1) of CGST Act is quite clear which mandates Commissioner to record reasons in writing for forming an opinion to pass an order for the provisional attachment of bank account for protecting the interest of revenue. Accordingly, the impugned order was quashed and remanded back to the Commissioner for recording reasons in writing. Accordingly, writ petition was allowed.

63. Deepak Singhal vs. Union of India

(2024) 22 Centax 407 (M.P.)

Dated: 30th August, 2024

Penal action under Indian Penal Code cannot be initiated without invoking specific provisions pertaining to penalty and prosecution under GST Law as well as obtaining permission from Commissioner under section 132(6) of CGST Act, 2017.

FACTS

Petitioner, a proprietor of M/s. Agrawal Soya Extracts, engaged in the business of Soya beans seeds and cakes. Summon was issued to the petitioner and a statement was recorded. Further, no action was taken against the petitioner. Subsequently, search and seizure operation was conducted by the respondent on the premises of one M/s. Shreenath Soya Exim Corporate, alleging that vide inspection report stating that it was a bogus firm involved in issuing invoice without supply of goods leading to wrongful availment or utilisation of input tax credit / refund of tax. Further, an FIR was registered under Indian Penal Code against the proprietor of M/s. Shreenath Soya Exim Corporate whereby petitioner was implicated. Being aggrieved by the same, the petitioner preferred this writ before Hon’ble High Court.

HELD

High Court held that GST is a special legislation and the penal provisions of the Indian Penal Code (IPC) cannot be invoked on part of the respondent by bypassing the procedure for prosecution and without invoking the penal provisions, the CGST Act or obtaining permission of the Commissioner as required under section 132(6) of CGST Act. The Court further stated that it would defeat the purpose of GST Act, 2017 if the power of search and seizure is delegated to local police officers. The Court further referred to the judgement of the Apex Court in Sharat Babu Digumarti vs. Government (NCT of Delhi) 2017 (2) SCC 18 where it was held that once the special provisions having the overriding effect do cover a criminal act and the offender, he gets out of the net of the IPC. Thus, FIR and consequential proceedings under IPC against the petitioner were quashed.

64. Cable and Wireless Global India Private Limited vs. Assistant Commissioner, CGST

[2024] 167 taxmann.com 288 (Delhi)

Dated: 26th September, 2024

 Refund of export of service cannot be denied merely on the receipt of payment by the supplier in his different branch bank account.

FACTS

The petitioner has its registered office in Karnataka and branch offices in Delhi and Maharashtra. It provided business support services to a company abroad from its branch office in Delhi. The petitioner filed an application claiming a refund of ITC in respect of various input services utilised in the course of the export of services. The GST authorities denied the claim on the grounds that the remittances concerned with those services were paid by foreign customers to the bank account of the Bangalore office, and hence, as far as Delhi office is concerned, it is a case of non-receipt of consideration. Aggrieved by the above rejection of the refund order, the petitioner preferred an appeal; however, the Order-In-Appeal also upheld the decision.

HELD

The Hon’ble Court noted that section 2(6)(iv) of IGST Act does not specify a particular bank account where payment must be received but only requires that it should be received by the supplier. It, therefore, held that merely because payment of service provided by the assessee was received in a bank account situated in Bangalore, same would neither warrant the location of the supplier identified in accordance with section 2(15) being altered nor would impact the determination of actual supplier of service. The Hon’ble Court found the revenue’s objections based on bank account remittance overly technical and unsustainable, and accordingly, it quashed the impugned order rejecting refund.

65. VeremaxTechnologie Services LTD. vs. Assistant Commissioner of Central Tax

[2024] 167 taxmann.com 332 (Karnataka)

Dated: 4th September, 2024

Consolidation of multiple assessment years into one single show cause notice under section 73 of the CGST Act is impermissible and is fundamentally flawed. Authorities should issue a separate notice for each assessment year.

FACTS

Petitioner was in receipt of impugned show cause notice dated 3rd May, 2024 and the order dated 21st November, 2023 issued by the GST authorities for the tax periods 2017–18, 2018–19, 2019–20 and 2020–21. The petitioner’s case was that under section 73 of the CGST Act, a specific action must be completed within the relevant year, and the limitation period of three years applies separately to each assessment year. Consequently, clubbing multiple tax periods in a single notice is impermissible and separate notices should have been issued for each assessment year under section 73(1) of the CGST Act. The petitioner relied on the judgment of the Hon’ble Madras High Court in the case of M/s. Titan Company Ltd. vs. Joint Commissioner of GST W.P.No.33164 of 2023. The Madras High Court, while addressing a similar issue, relied on the Hon’ble Supreme Court’s decision in the State of Jammu and Kashmir and Others vs. Caltex (India) Ltd., AIR 1966 SC 1350. The Hon’ble Apex Court held that where an assessment encompasses different assessment years, each assessment order can be distinctly separated and must be treated independently.

HELD

The show cause notices issued by the respondent were held to be fundamentally flawed on the grounds that the practice of issuing a single, consolidated show cause notice for multiple assessment years contravenes the provisions of the CGST Act.

66. New Jai Hind Transport Service vs. Union of India

[2024] 167 taxmann.com 133 (Uttarakhand)

Dated: 27th September, 2024

The cost of fuel used by the recipient of service cannot be added to the value of supply (i.e.,freight charges) by the Goods Transport Agency (GTA).

FACTS

The petitioner M/s. New Jai Hind Transport Service provided services of GTA to its customers. The petitioner filed an application before the GST Advance Ruling Authority (AAR) seeking the advance ruling on the following question:

“Whether the value of free diesel filled by service recipient under the accepted terms of contractual agreement in the fleet(s) placed by GTA service provider will be subject to the charge of GST by adding this free value diesel in the value of GTA service, under the Central Goods and Services Tax Act, 2017 & Uttarakhand Goods and Service Tax Act, 2017?”

The ld. AAR ruled that the value of diesel filled by the service recipient in the vehicle(s) provided by the petitioner, on an FOC basis as per the terms of the agreement, will be subject to the charge of GST by adding the free value of diesel to arrive at the transaction value of GTA service. The petitioner challenged the said order which was upheld by the Appellate Authority for Advance Ruling Uttarakhand. Aggrieved by the same, the petitioner filed an appeal before the court of law.

HELD

The Hon’ble Court referred to the decision of the Hon’ble Apex Court in the matter of Commissioner of Service Tax & others vs. Bhayana Builders (P) Ltd. (2018) 3 SCC 782 and held that as per the agreement, the cost of fuel was to be borne by the service recipient and therefore, it cannot be added in the transaction value of goods transport agency service
under sections 15(1) and 15(2)(b) of the CGST Act, 2017.

67. Bajaj Herbals (P.) Ltd vs. Deputy Commissioner of Customs

[2024] 167 taxmann.com 390 (Gujarat)

Dated: 26th September, 2024

Where the assessee inadvertently did not include the export invoice in GSTR-1 and was subsequently precluded by the Computer System from amending the same, the High Court directed the department to process the refund claim manually after noting that the eligibility of the refund is not in dispute.

FACTS

The petitioner exported the goods but inadvertently did not include the amount of IGST paid by the petitioner in Form GSTR-1 for the relevant month. However, the petitioner included the amount of IGST paid in Form GSTR-3B as well as Form GSTR-9 filed under the relevant rules of the CGST Act, 2017. The petitioner on coming to know that it did not receive the refund tried to amend the Form GSTR-1 but the same was not allowed by GSTN. The petitioner, thereafter, by various communications, representations and letters requested the GST authorities to permit the petitioner the refund of the IGST paid on the “Zero Rate Supplies” and also filed a CA Certificate in terms of Circular no.12 of 2018-Cus dated 29th May, 2018. However, the Customs Department responded that there is no mechanism for the Customs Department to rectify the errors committed by the appellant. Aggrieved by the same, the petitioner approached the Court.

HELD

The Hon’ble Court noted that the department has admitted that but for the computer system not permitting the refund to the petitioner, the petitioner is otherwise eligible for the refund for the two shipping bills for which the petitioner has paid the IGST as per the provisions of the Act and the Rules and the respondent authorities to immediately act and manually process the refund payable to the petitioner.

Recent Developments in GST

A. NOTIFICATIONS

i) Notification No.17/2024-Central Tax dated 27th September, 2024

Above notification seeks to notify dates for applicability of the provisions of Finance (No. 2) Act, 2024.

ii) Notification No.18/2024-Central Tax dated 30th September, 2024

Above notification seeks to notify Principal Bench of GST Appellate Tribunal to hear cases of anti-profiteering, effective from 1st October, 2024.

iii) Notification No.19/2024-Central Tax dated 30th September, 2024

Above notification under section 171 of CGST Act (which deals with Anti Profiteering measure) is to provide for making above section ineffective from 1st April, 2025.

iv) Notification No.20/2024-Central Tax dated 8th October, 2024

Above notification seeks to make amendments in CGST Rules, 2017. Most of the changes are consequential in light of changes in Principal Act. There are also changes relating to issue of invoices, GST Amnesty (Section 128A) and others.

v) Notification No.21/2024-Central Tax dated 8th October, 2024

Above notification seeks to notify certain dates for compliance of GST Amnesty, as per section 128A of CGST Act.

vi) Notification No.22/2024-Central Tax dated 8th October, 2024

Above notification seeks to notify special procedure, under section 148 of the CGST Act, for rectification of demand orders issued for contravention of section 16(4) of the said Act, but now eligible as per newly inserted section 16(5) and 16(6).

vii) Notification No.23/2024-Central Tax dated 8th October, 2024

Above notification seeks to provide waiver of late fees for late filing of NIL FORM GSTR-7, which is in relation to TDS.

viii) Notification No.24/2024-Central Tax dated 9th October, 2024

Above notification seeks to amend Notification No. 5/2017-Central Tax dated 19th June, 2017 by amending the exemption from getting Registration, which is denied to dealers in metal scrap.

ix) Notification No.25/2024-Central Tax dated 9th October, 2024

Above notification seeks to amend Notification No. 50/2018-Central Tax dated 13th September, 2018 to introduce TDS in relation to Metal scrap.

B. NOTIFICATIONS RELATING TO RATE OF TAX

i) Notification No.5/2024-Central Tax (Rate) dated 8th October, 2024

Above notification seeks to amend entries in Schedules I, II, III and IV in respect of certain products with effect from 10th October, 2024.

ii) Notification No.6/2024-Central Tax (Rate) dated 8th October, 2024

Above notification seeks to amend Notification No.4/2017 – Central Tax (Rate) dated 28th June, 2017. The amendment is to cover metal scrap in the scope of RCM.

iii) Notification No.7/2024-Central Tax (Rate) dated 8th October, 2024

Above notification seeks to amend Notification No 11/2017-Central Tax (Rate) dated 28th June, 2017. The changes are related to rate of tax on services like Transportation of Passengers, etc.

iv) Notification No.8/2024-Central Tax (Rate) dated 8th October, 2024

Above notification seeks to amend Notification No 12/2017-Central Tax (Rate) dated 28th June, 2017. The changes are to include further services in exempted category like metering equipment on rent, etc.

v) Notification No.9/2024-Central Tax (Rate) dated 8th October, 2024

Above notification seeks to amend Notification No 13/2017-Central Tax (Rate) dated 28th June, 2017. The amendment is to include renting of property by unregistered person in RCM.

C. CIRCULARS

Following circulars have been issued by CBIC.

(i) Clarification regarding applicability of GST on certain services — Circular no.234/28/2024-GST dated 11th October, 2024.

By above circular, clarification regarding the applicability of GST on certain services is given.

(ii) Clarification regarding GST rates & classification of goods — Circular no.235/29/2024-GST dated 11th October, 2024.

By above circular, clarifications regarding GST rates & classification (goods) based on the recommendations of the GST Council in its 54th meeting held on 9th September, 2024 are given.

(iii) Clarification regarding scope of “as is / as is, where is basis” — Circular no.236/30/2024-GST dated
11th October, 2024.

By above circular, clarification regarding the scope of “as is / as is, where is basis”, mentioned in the GST Circulars, is given on the basis of recommendation of the GST Council.

D. ADVISORY

1) Vide GSTN, dated 17th September, 2024, information is given about certain changes in Table 4 of GSTR-3B regarding availment& reversal of ITC along with reporting of reclaiming and ineligible ITC.

2) By the GSTN, dated 17th September, 2024, draft manual on Invoice Management System is issued.

3) By GSTN, dated 29th September, 2024, the advisory for bio-metric based Aadhaar authentication for GST registration for application, in Odisha, is issued.

4) By Advisory, dated 29th September, 2024, information about restoration of returns data on portal is given.

5) By GSTN, dated 4th October, 2024, an advisory on Proper Entry of RR No. Parcel Way Bill (PWB) Numbers in EWB system Post EWB-PMS Integrated is issued.

E. INSTRUCTIONS

The CBIC has issued instruction No.4/2024-GST dated 4th October, 2024 by which instruction about systemic improvement with respect to mapping/de-mapping of the officers on the GSTN portal is given.

F. ADVANCE RULINGS

33. Supply from FTWZ — No GST.

M/s. Sunwoda Electronic India Pvt. Ltd. (AR Order No.06/ARA/2024 dated 30th April, 2024 (TN)

The applicant is engaged in the business of importing and trading Portable Lithium System Batteries classifiable under 85076000 and registered under GST.

The Applicant enters into a contract with an Original Equipment Manufacturer (OEM) licensed under Section 65 of the Customs Act, 1956, read with Manufacture and Other Operations in Warehouse (No.2) Regulations, 2019 (MOOWR) for supply of imported Portable Lithium System Batteries. In order to perform the contract, the said goods are imported by the Applicant from abroad to a third-party Free Trade Warehousing Zone (3P FTWZ) in India. The goods are sold to the OEM’s MOOWR unit while lying in the 3P FTWZ and are cleared under bond by the OEM’s MOOWR unit, on need basis. Under these circumstances, the applicant filed an application seeking Advance Ruling on the following question:

“Whether, in the facts and circumstances of the case, GST is leviable on the sale of Applicant’s goods warehoused in a third-party Free Trade Warehousing Zone (‘3P FTWZ’) on ‘as is where is’ basis to customer who clears the same to bonded warehouse under MOOWR Scheme?”

The applicable steps involved in the said business-model like the placing of the order for import of Portable Lithium System Batteries on its overseas group company and at the same time entering into a warehousing agreement with M/s. DHL Supply Chain India (P) Ltd., (DHL) for storage of imported goods in the 3P FTWZ situated at Nandiambakkam Village, Thiruvallur District, Tamil Nadu, on its behalf were explained. The goods are billed to the applicant and shipped directly to the 3P FTWZ for storage, and accordingly, the ‘Bill to’ party is applicant and the ‘Ship to’ party is DHL. DHL files the Bill of Entry for Warehousing on behalf of the applicant, and upon clearance, the same are stored in 3P FTWZ until further sale of such goods by the applicant.

The applicant sales goods on ‘as is where is’ basis to OEM’s MOOWR unit. ‘Bill from’ party is applicant and ‘ship from’ party is DHL (3P FTWZ).

Further, the ‘Bill to’ party is OEM customer name and address, and the ‘Ship to’ party would be the OEM Customer’s MOOWR unit and its address. Essentially, applicant sells the goods lying in FTWZ warehouse to OEM’s MOOWR unit by transfer of title.

After sale, as above, for effecting the movement of goods, the OEM’s MOOWR unit provides the authorisation to file Bill of Entry, IEC/GST/AD Code, Warehouse license and WH code to DHL.

It is clarified by applicant that this type of movement is permissible in terms of CBIC’s Circular No.48/2020-Customs dated 27th October, 2020.

The applicant also follows further procedure about such sale.

Appellant contended that activities or transactions specified in Schedule III of the CGST Act, 2017 shall be treated neither as a supply of goods nor a supply of service. Applicant cited Paras. 7 & 8 of Schedule III.

Accordingly, it was contended that impugned supply being covered under Schedule III, no tax is attracted.

Applicant, in alternative, also submitted that its sales is outside GST even under Para. 7 of the Schedule III of the CGST Act, 2017, which covers the supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India.

The learned AAR referred to above provisions and facts of transaction.

The learned AAR concurred with applicant that the Free Trade Warehousing Zone (FTWZ) gets covered as a Special Economic Zone (SEZ), within the meaning of the term “SEZ”.

The ld. AAR also observed that Special Economic Zones are deemed to be considered as ports, airports, inland container depots, land stations, outside the Customs territory of India, under Section 7 of the Customs Act, 1962, which deals with the appointment of ports, airports, etc.

The ld. AAR also noted the Circular No.04/01/2019-GST dated 1st February, 2019.

The ld. AAR, noting Schedule III, observed that, the ‘warehoused goods’, as specified in clause 8(a) of the Schedule III, covers the warehouses / warehoused goods in FTWZ / SEZ.

The ld. AAR observed that when the imported goods are warehoused, as long as the said goods are not cleared for home consumption, duties under Customs, including IGST are not required to be discharged, more specifically, as per the legal position in clauses 7 and 8 in Schedule III of the CGST Act, 2017.

The ld. AAR held that GST is not leviable on the sale of goods warehoused in 3P FTWZ on “as is where is” basis to customers who clear the same to bonded warehouse under the MOOWR Scheme.

34. “Pre-Packaged and Labelled Commodity” — Scope.

M/s. Asvini Fisheries Pvt. Ltd. (AR Order No.03/ARA/2024 dated 27th March, 2024 (TN)

The applicant is engaged in the business of exporting processed shrimps for over three decades and registered under GST Act. Appellant filed an application seeking Advance Ruling on the following issues:

“1) Whether the export of processed frozen shrimps (HSN: 0306) packed in individual printed pouch / box, further packed inside a printed master carton (of up to 25 legs each), containing the design, label and other particulars provided by the buyer, attracts GST.

2) Whether the export of processed frozen shrimps (HSN: 0306) packed in individual plain pouch / box, further packed inside a plain master carton (of up to 25 kgs each), attracts GST.”

Applicant explained that the applicant sources shrimps locally from farmers, which undergo further processing in the factory such as receiving, washing, de-veining, peeling, de-heading, tail removal, sorting, grading and freezing. The scope of processing depends on the customer’s requirements / order.

Applicant submitted that it is classifying the above commodities under chapter 3 under sub heading 0306 and discharging tax as per S.No.4 of Schedule 1 of Notification 02/2017 – Central Tax (Rate) dated 28th June, 2017 up to 12th July, 2022.

Referring to Provision in Legal Metrology Act, 2009, the applicant submitted that Legal Metrology Act will apply to the commodities packed in India where the ultimate consumer details are not available at the time of sale, irrespective of the fact whether the goods are sold in India or exported outside India.

Applicant stated that in the instant case, the applicant is pre-packing the products as per the customer requirements ranging from 1/2 kg to 2 kgs in primary packs by printing the customer brand name and other details as provided by the customer for the export sale.

The ld. AAR made reference to entries under IGST Act and noted that supply of Shrimp (Crustaceans), which falls under HSN 0306, other than fresh or chilled, pre-packaged and labelled is taxable at 5 per cent under IGST, vide entry no 2, Schedule I of the principal Notification No.1/2017-Integrated Tax (Rate) dated 28th June, 2017.

The ld. AAR observed that impugned commodity falling in entry at Sl. No. 21 of the Exemption Notification 2/2017 Tax (Rate), dated 28th June, 2017, is ruled out as the said Entry is meant for all goods, fresh or chilled, and not for frozen goods.

Based on above, it was held that the bifurcation is to be seen as to whether it is “pre-packaged and labelled”, or “other than pre-packaged and labelled”.

For above purpose, the ld. AAR referred to definition of said item in Legal Metrology Act, 2009 and observed that a commodity to be considered as ‘Pre-packed and labelled’ shall associate with the following features as under:

“a. that which comprises a pre-determined quantity as circumscribed under the meaning of “pre-packaged commodity” vide Section 2(1) of the Legal Metrology Act, and

b. that which is required to bear the declarations under the provisions of the Legal Metrology Act, 2009 (1 of 2010) and the rules made thereunder.”

The ld. AAR, considering fact of packing requirement, observed that since the inner packing is printed and is having predetermined quantity, it immediately attains the characteristics of ‘pre-packaged and labelled’ category, meant for retail sale, irrespective of the fact whether the outer packaging is printed or not. Accordingly, it is held that the inner packaging, which ranges from 250 grams to 2 kgs becomes liable to GST, as the same shall fall within the ambit of ‘pre-packaged and labelled’ category. Similar position was also held in relation to plain pouch / box / master carton.

Accordingly, the ld. AAR ruled that GST would be applicable on the supply of pre-packaged and labelled shrimps up to 25 kgs, irrespective of the fact whether it is meant for domestic supplies or for export, as long as they are specified commodities that are pre-packaged.

35. Export on FOB basis — RCM on Freight.

M/s. DCW Ltd. (AR Order No.04/ARA/2024 dated 28th March, 2024 (TN)

Applicant is engaged in the manufacture of chemical products like ‘Caustic Soda’, PVC resin, etc. They are registered under the GST Acts. They have filed an application seeking Advance Ruling on the following questions:

“1) Whether the exporter (M/s. DCW Ltd.) is liable under RCM basis to pay GST on the export freight on the FOB basis of exports;

2) Whether the shipping line who accepts the goods from the exporter (M/s.DCW Ltd.) is liable to pay GST on RCM basis;

3) Whether the ‘export freight involved’ is liable to GST on RCM basis for the goods exported (on which GST is liable and permitted to be exported under LUT) on FOB basis (Free on Board);

4) Whether the ‘export freight involved’ above constitutes an inter-state supply subject to IGST; and
5) If liable to GST, what is the taxable value to be adopted as freight is not known to the exporter.”

Applicant has export of goods and export was on FOB basis. In case of FOB basis of export, the freight is paid by the overseas buyer to the freight forwarder / shipping line. The exporter hands over the export goods, either factory stuffed or port loaded, in the container to the shipping line at the customs port. The exporter files shipping bill which is assessed by the customs, and the export order is issued by customs after the containers are loaded onto the ship and it sails the port on the basis of export general manifest filed by the shipping line.

The ld. AAR observed that determining ‘place of supply’ is necessary and referred to provisions in IGST Act relating to said term like, sections 10, 11, 12, 13 and 14 of IGST Act.

The ld. AAR noted changes in sections 12(8) and 13(9) and observed that from 1st October, 2023 onwards, with the omission of Section 13(9), the ‘place of supply’ under Section 13 (where location of supplier or location of recipient is outside India) gets fixed by default as the ‘location of the recipient of service’, vide Section 13(2) of IGST Act.

Similar changes made in section 12 also noted (where location of supplier and recipient is in India) when provided to a ‘registered person’, shall be the location of such person, which in turn happens to be the ‘recipient of service’.

The ld. AAR also made reference to notification relating to RCM. It is noted that by virtue of power u/s. 9(1) of CGST Act, notification no.13/2017-Central Tax (Rate) dated 28th June, 2017 is issued enumerating certain items on which tax is payable on RCM basis. The ld. AAR also referred to similar Notification no.10/2017 issued under IGST Act.

The ld. AAR, on perusal of both the notifications referred above, observed that no entries relating to ‘export freight’ find place in the said notifications.

On above legal position and considering facts, the ld. AAR found that in case of exports on FOB basis, the exporter (applicant) is not at all involved in any way with the ‘export freight’, as the same is to be arranged by the overseas buyer themselves, or through his agent. The ld. AAR observed that the exporter is neither the provider nor the recipient of service relating to ‘export freight’. Accordingly, the ld. AAR ruled that the question of payment of GST on RCM basis on the export freight on the FOB basis of exports by the applicant does not arise.

Relating to the remaining questions, the ld. AAR held that they are not related to the liability of applicant and hence, declined to answer the same.

36. Second hand goods — Scope of Rule 32(5)

Kundan Kumar Prasad (AR Order No.07/WBAAR/2024-25 dated 10th September, 2024 (WB)

The applicant has submitted that it proposes to be a manufacturer and general order supplier of gold and diamond ornaments. The applicant proposes to be a karigar and wants to provide order-based services required by the customer.

Applicant has different business modes like:

(a) The applicant purchases second-hand gold or diamond jewellery from unregistered individuals and, thereafter, repairs or reshapes these items by melting the old jewellery items and transforming those into new pieces.

(b) The applicant purchases old / second-hand gold or diamond jewellery from unregistered individuals without GST. The applicant then reshapes the old jewellery as provided by the buyer into a new one, which is considered a change in shape rather than a change in the nature of the goods.

(c) The applicant purchases second-hand gold or diamond jewellery from unregistered individuals and transforms them into new or refurbished pieces, charging only for the making process.

Based on above, the following questions were raised:

“(1) Whether the applicant falls under the category of a person dealing in buying and selling of second-hand goods where tax is to be paid on the difference between the selling and purchase price as stipulated in Rule 32(5) of the CGST Rules, 2017.

(2) Whether the transaction of purchases of old / second hand gold jewellery / ornaments or diamond jewellery / ornaments from individuals who are not dealers / registered under GST would tantamount to supply of goods or supply of services and whether the applicant is liable to pay tax on reverse charge basis against such purchases?
(3) Whether the transaction would be classified as supply of goods and/or services under the act?

(4) Whether it shall be classified as supply of goods and chargeable to tax @ 3% under HSN: 7108/7113 or whether it shall be classified as supply of service and chargeable to tax @ 5% under SAC: 9988?

(5) Whether the applicant is liable to pay GST on the goods received from the buyer?”

It is explained by the applicant that he does not pay GST on RCM on the purchase of these old jewellery / parts as per Notification No. 10/2017-Central Tax (Rate) dated 28th June, 2017 although he pays the GST on outward supplies of customised ornaments supplied to the buyers as per their requirements under Rule 32(5). No ITC is claimed by applicant.

The applicant sought to argue that he fulfills condition of Rule 32(5), which provides for payment of tax on margin in relation to second-hand goods.

The attempt was to show that the Tariff heading 7113 of Customs covers Article of Jewellery and parts thereof and when the applicant converts the old gold jewellery into a new one, the nature of goods as well as the characteristic and classification of the goods does not change. It was submitted that the Tariff heading of the goods also remains the same, i.e., 7113 and thus, the processing done by the applicant satisfies the required condition. It was clarified that the applicant is not claiming ITC and, therefore, fulfils all conditions of Rule 32(5). Accordingly, the applicant made a submission that he is liable to pay tax on margin as per above Rule.

The ld. AAR observed that Rule 32(5) refers to minor processing. The ld. AAR observed that the applicant purchases second-hand gold or diamond jewellery from unregistered individuals and thereafter repairs or reshapes these items by melting it and transforming it into new pieces, such as changing a gold bangle into a bracelet or an earring into a locket. The ld. AAR held that in the instant case, the purchased gold is used as a raw material or input to make a new commodity.

Noting above position, the ld. AAR held that in case where the applicant, after making purchases of old / second-hand jewellery / ornaments, carries out the process of melting it to manufacture a new / different ornament, the applicant cannot adopt the valuation method as prescribed in Rule 32(5). The ld. AAR also held that where the old gold ornaments / jewellery is purchased and subsequently supplied after minor processing that does not change the nature of the ornaments so purchased, the applicant can pay tax on the value as determined under Rule 32(5).

The ld. AAR further observed that Rule 32(5) is available when a registered person is dealing in buying and selling of second-hand goods only, and where the registered person deals with different business activities, such as engaged in supply of services, manufacturing or selling new articles, apart from dealing with buying and selling of second-hand goods, it cannot avail the benefit of Rule 32(5). The ld. AAR held that in such a case, GST is payable at the applicable rate on the actual value of the commodity and not on the margin value.

RCM Provisions – Recent Developments

Indirect tax laws as transaction taxes are generally designed to be collected from the initiator/ originator of the transaction (say supplier / seller service provider). Reverse charge provisions (‘RCM’) flip this default rule and shift the tax liability onto the receiver of the supply. The provisions emerge from the ‘tax collection’ powers granted under Article 246A of the Constitution. Since the levy continues to be governed by the provisions of section 7, 9(1)/5(1), all levy parameters (such as supply, business, consideration, etc) must be independently satisfied as a prequel to the RCM provisions. This article revolves around this fundamental principle and decodes the recent legal developments in this light.

LEVY & SCOPE OF SUPPLY — SUPPLIER AND TAXABLE PERSON CONUNDRUM

Section 9 levies a tax on the transaction of ‘supply’ of goods or services and such tax is to be ‘collected in the manner prescribed’ and ‘paid by the taxable person’. Section 7 (except 7(1)(aa) and (b)) enumerates that supplies have to be ‘in the course of furtherance of business’. Undoubtedly, the sine-qua-non for an activity to be termed as supply u/s 7(1)(a) is it should meet the business test. Now the question arises on the application of this ‘business test’ — whether it should be applied at the supplier’s end or recipient’s end. To decide on the vantage point of supply (whether it’s from the supplier’s or recipient’s perspective) we inter-mingle the provisions of sections 7(1)(a) and 9. Clearly, supply u/s 7(1)(a) is curated from the perspective of a supplier ‘making’ a supply in the course or furtherance of business. Only a supplier ‘makes’ a sale or service or lease and hence scope of supply u/s 7(1)(a) should be understood from his/her viewpoint. Thus, levy under the section would be triggered only when a supplier makes a supply in the course of his business though the tax will be collected from a ‘taxable person’ who may not be a supplier.

We can infer this from the distinction in the definition of supplier and taxable person. A ‘taxable person’ u/s 2(107) has been defined as ‘any person’ who is registered or liable to be registered under section 22/24: it includes (a) suppliers crossing the 20-lakh turnover threshold; and also (b) other specified persons who may or may not be in business but are liable for compulsory registration irrespective of having any turnover (say person affixed with RCM liability). Therefore, a taxable person may not always be the supplier and hence need not be in business, but the converse is not true, and the supplier would in all cases have to be in business for the levy to be applicable. One may comfortably state that the levy of GST on supply u/s 7(1)(a) is to be understood primarily from a supplier’s perspective (as being part of business activity) though the collection of the tax, as part of the legislative choice, is from a ‘taxable person’ who need not be in business.

This also becomes prominent on comparing RCM provisions with aggregator provisions (e-commerce operators governed u/s 9(5)), where such aggregators are specifically treated as suppliers liable to tax even though they only mediate the transactions between a de-facto supplier and recipient. The e-commerce operator is affixed with all statutory responsibilities for payment of tax as applicable to a supplier and includes ascertaining the nature of supply, rate of tax, type of tax, invoice generation, time of supply, etc. Section 9(5) literally supplants the e-commerce operator as a supplier for the purpose of collection of tax irrespective of the business and registration status of the de-facto supplier. Unlike RCM, an E-commerce aggregator is obligated to discharge the tax by himself by raising the outward supply invoice on behalf of the service provider and remitting the same to the Government.

To further buttress the ‘business test’ principle stated above, we can fall back upon the Government’s Press release1 in the context of section 9(4) which clarifies that the sale of old jewelry by an individual consumer is not emerging his / her business activity, rather a personal activity, and the registered jeweler as a recipient cannot be imposed with RCM merely because the buying activity is in course of his business. It is only when an unregistered seller is engaged in business (say unregistered on account of turnover thresholds, etc.) can be said to be liable to RCM u/s 7(1)(a). This principle can now be extended even to services/ functions performed by Governments & municipalities. We have some of the government functions already being enlisted as part of section 7(2) and termed as being neither supply of goods nor services. In many other instances, Government(s) are performing the service / activity as part of statutory obligations and not as part of a supply or service. While we are not referring to Government monopolies (such as Indian Railways), certain licenses or approval fees granted for statutory permissions and other functions devolve onto the authority by enacted legislations and not be pursuant to trade or commerce. They operate under the obligations of a statute and are not bound by commercial / contractual negotiations. The activity may not be treated as a supply of service u/s 7(1)(a) and accordingly RCM notifications (which are merely collection tools) cannot by virtue of an entry treat the activities as liable to tax in the hands of the recipient. The entries need not be necessarily struck down. It must be narrowly interpreted to be applicable only to those cases where the Government/ municipality is in business and performing a commercial activity. One may also consider applying this principle to RCM imposed on development rights in case of a supply of TDRs/FSIs by ‘any person’ to a ‘Promoter’. The phrase ‘any person’ should be understood as any land-owner promoter who is engaged in business activity. Where the landowner engaged in real estate development of his personal asset distinct from his regular income activity, an argument can still be canvassed that the land-owner is not engaged in a trade/ commerce, etc., and arguably the transaction is not a supply in terms of section 7(1)(a). Consequently, one need not even go down the path of examining the RCM provisions u/s 9(3) for TDR taxation.

1 No. 78/2017, dated 13th July, 2017

The only flip side to this argument is that the revenue will always claim that the term ‘business’ is so wide that any income-generating activity (including Government functioning as a public authority, land development activity) would be liable to be part of trade or commerce. Moreover, the very purpose of RCM may be defeated if supply is understood from the supplier’s perspective and not from the perspective of the recipient. The above proposition would be faced with subjectivity and unfortunately, the facts for establishing that the RCM supplier (say landowner) is not is business is not generally available with the recipient (developers) who have been characterized as taxable persons in respect of the DRs. In other words, the RCM scheme operates only on the taxable person and does not mandate the unregistered landowner to come forward and establish whether they are in business or not. So, let’s examine if some respite can be obtained from other tax liability provisions of section 13 below.

TIME OF SUPPLY & INVOICING — SECTION 12(3) AND 13(3)

We all know that the time of supply and invoicing provisions have been specifically crafted for RCM supplies and are distinct from regular forward charge supplies (FCM). While FCM u/s 12(2)/13(2) provide for tax liability on the supply of goods/services at the earliest of (a) issuance of invoice (b) provision of service where the invoice is not issued within 30 days of completion or (c) the receipt of payment; RCM u/s 12(3)/13(3) is imposed at the earliest of (a) date of payment or (b) date of receipt of goods or (c) 30/60 days from the date of issue of any invoice or document by the supplier. It is only where supply is indeterminable by virtue of the above criteria would ‘the date of entry in books of accounts’ is treated as the date of tax liability. We need to keep in mind that entry in books of account can be resorted to only in cases of in-determinability and cannot be invoked merely on account of a delayed occurrence of the other events specified in 12(3)/13(3).

To further appreciate the liability provisions, invoicing provisions are to be examined.

– In respect of the supply of goods registered suppliers, 31(1) provided for raising the tax invoice before removal of the goods (with RCM tick);

– In respect of services by registered supplier, section 31(2) provides for raising a tax invoice (with RCM tick) within 30 days from completion of service; and

– In both the above cases where the RCM supplier is unregistered, 31(3)(f) mandates raising a self-invoice for goods or services by the recipient himself.

Interestingly, section 31(3)(f) which applied to unregistered RCM supplies did not clearly spell the outer time limit of raising the self-invoice. Pre-amendment, the provisions read as follows:
31(3)(f) a registered person who is liable to pay tax under sub-section (3) or sub-section (4) of section 9 shall issue an invoice in respect of goods or services or both received by him from the supplier who is not registered on the date of receipt of goods or services or both;

In the absence of punctuation after the phrase ‘supplier who is not registered’, it was interpreted that the date was with reference to the registration status of the supplier and was not intended to specify the due date for raising the self-invoice and hence technically there did not exist any due date for raising the invoice. The department however read the provision as specifying the date of raising the self-invoice and not with reference to the date of registration status of the supplier as the registration status was anyways implicitly understood to be examined on the
date of supply. The provisions should not be rendered otiose and read not in conformity with the overall section.

Applying the above to the time of supply provisions, RCM liability for goods or services was understood as distinct from the invoicing provisions, giving rise to practical difficulties.
Therefore, in cases of RCM supplies by registered persons, the registered person is statutorily required to communicate the RCM liability through its ‘RCM-tax-invoice’ which is also uploaded in GSTR-1 and communicated to the recipient in GSTR-2A (with RCM tick). The recipient based on such RCM-tax-invoice discharges the said liability u/s 12(2)/ 13(2). However, in cases where the supplier is unregistered, the supplier is not under a GST obligation to raise a tax invoice and in many cases, even a ‘commercial invoice/document’ is not raised (say Government departments, Artists, Recovery agents, Landowner promoters, etc), and as a practice, the recipient would discharge the tax liability on the date of payment or recording of a ‘Self-tax-invoice’ in the books of accounts admitting the inward supply. But when provisions were strictly applied, the due date was not ascertainable on the application of provisions of section 13(3). Is this practice an appropriate approach and does it discharge the recipient from any assessment challenges?

There is a critical difference between FCM and RCM liability for services which needs to be appreciated. The FCM scheme has included ‘service completion’ as one of the criteria for imposing the tax liability on the supplier and hence even in the absence of a tax invoice being raised on service completion, FCM liability can still be fastened onto the supplier. In the case of RCM, the liability is fastened based on only two variables i.e. payment or invoice raised by the supplier and delinked from the service completion. It is only on happening of any of these two events i.e., payment or invoice/ commercial document raised by the supplier (both registered and unregistered) would RCM be imposed under section 13(3). 31(3)(f) was previously interpreted as not prescribing any due date for raising commercial documents and even if due dates were prescribed the law relies upon the actual date of issuance of these documents for fixing the liability – i.e. even if the invoice is belatedly raised tax liability arises only on date of issuance and not before that.

This RCM controversy can be understood in multiple heads:

a) In respect of services from registered suppliers

The recipient availing services from registered suppliers should ideally await the tax invoice (RCM tick) for discharge of liability under section 9(3) r/w 13(3). Where RCM invoices were raised by registered suppliers, recipients were liable to discharge the tax. But in many cases recipients were not aware of the registration status of the supplier and whether he should await the RCM tax invoice. Because of a likely delay/ failure in raising an invoice by RCM suppliers, as a practice, recipients would treat the transaction as an unregistered RCM supply at their end and raise a self-tax-invoice for discharge of the RCM liability (irrespective of the actual date of issuance of RCM-tax-invoice by the registered supplier). Confusion arose on account of the discharge of RCM liability in a particular year and the reporting of the same by the RCM supplier in a different year.

b) With respect to services from unregistered suppliers including the import of services

In other instances, recipients availing services from unregistered suppliers have even failed to raise the self-tax-invoice either on account of being unaware of the tax liability or on account of interpretational issues (such as GST on mining royalties, secondment arrangements, license fees, etc.). In such cases, the department has issued notices proposing tax liability based on entry in books of accounts in terms of section 13(3). The recipients on the other hand were in a dilemma on whether at all tax liability had been triggered in the absence of an invoice or any commercial document from the unregistered suppliers and believed that section 31(3)(f) did not prescribe any due date. This was not a case of in-determinability but a case of delayed raising of self-tax-invoice and hence recipients claimed that RCM liability stands triggered only on the day the self-tax-invoice is actually raised.

c) In respect of Schedule I supplies from associated enterprises

Import of services between related entities which were deemed as taxable in terms of Schedule I r.w. 7(1) of CGST Act, 2017 r.w. IGST Act, 2017 faced a completely absurd issue. In such cases, the related entities being non-residents did not having any establishments in India and hence were generally unregistered. The provisions of section 13(3) r.w 31(3)(f) would operate and the liability to tax on the registered recipient would be the earliest of (a) date of payment or (b) date of issue of commercial invoice by the supplier. Schedule I transactions between associated enterprises are notional transactions and are not backed by commercial documents or accounting entries. On a strict application of sections 13(3) and 31(3)(f), in the absence of any payment (as no consideration is involved), commercial invoice / document, and entry in books, technically no tax liability can be fixed on such transactions. Academically speaking, the Indian registered entity had the choice to ascertain the due date of its own tax liability and was not subjected to any statutory due date. Moreover, 31(3)(f) was being interpreted as not specifying any date for raising the self-invoice. The levy itself could have been said to have failed in the absence of a self-tax-invoice raised by the recipient.

AMENDMENT VIDE FINANCE ACT, 2024

The above controversy orchestrated the amendment to section 13(3) which is underlined below:

“(3) In case of supplies in respect of which tax is paid or liable to be paid on a reverse charge basis, the time of supply shall be the earlier of the following dates, namely:

(a) the date of payment ……….; or

(b) the date immediately following sixty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier, in cases where the invoice is required to be issued by the supplier

(c) the date of issue of invoice by the recipient, in cases where the invoice is to be issued by the recipient

Provided that where it is not possible to determine the time of supply under clause (a) clause (b) or clause (c), the time of supply shall be the date of entry in the books of account of the recipient of supply:

Provided further that in case of supply by associated enterprises, where the supplier of service is located outside India, the time of supply shall be the date of entry in the books of account of the recipient of supply or the date of payment, whichever is earlier.

Section 31(3)(f) a registered person who is liable to pay tax under sub-section (3) or sub-section (4) of section 9 shall, within the period as may be prescribed, issue an invoice in respect of goods or services or both received by him from the supplier who is not registered on the date of receipt of goods or services or both;

Rule 47A. The time limit for issuing tax invoices in cases where the recipient is required to issue an invoice.– Notwithstanding anything contained in rule 47, where an invoice referred to in rule 46 is required to be issued under clause (f) of sub-section (3) of section 31 by a registered person, who is liable to pay tax under sub-section (3) or sub-section (4) of section 9, he shall issue the said invoice within a period of thirty days from the date of receipt of the said supply of goods or services, or both, as the case may be”

This amendment now addresses the scenarios as follows — in the case of supplies from registered persons, the recipient should await the RCM tax invoice and only then discharge the RCM liability and ought not to raise the self-invoice by treating the same as an unregistered supplier; and similarly in case of unregistered RCM suppliers, invoice would liable to the raised only on completion of 30 days from receipt of goods / services and only on the date of actual issue of self-tax-invoice by the recipient would the tax liability ultimately arise.

While the amendment provides clarity by splitting scenarios for registered and unregistered suppliers and clarifying the relevant document that triggers the liability, it still stops short of addressing the impact of delayed invoicing by suppliers/ recipients on time of supply provision. As an eg, a registered transporter who belatedly raises the invoice for the RCM supply would be covered by clause (b). Despite the delay in raising the invoice by the transporter, the RCM tax on the same would be paid by the recipient in the tax period on which the invoice is raised and not the date of completion of service by the transporter, leading to an interest loss to the exchequer. Similarly, in cases of renting services of commercial buildings from unregistered suppliers, the RCM would be payable by the registered recipient only on the date of issuance of the self-tax invoice and not prior to that. This is because the time of supply after the amendment continues to revolve on the “date of issue” and not the “due date of issue” of the respective invoice. The due date of issuance which is governed by section 31(2) or 31(3)(f) continues to be de-linked from the provisions of section 13(3). Accordingly, Circular No. 211/5/2024-GST dt 26th April, 2024, which claims that interest is liable to be paid by a taxable person on account of delayed self-invoicing seems to be missing this interpretation based on first principles. It states as follows:

“2.3 Further, clause (f) of sub-section (3) of Section 31 of CGST Act provides that a registered person, who is liable to pay tax under sub-section (3) or sub-section (4) of Section 9, shall issue an invoice in respect of goods or services or both received by him from the supplier who is not registered on the date of receipt of goods or services or both. Accordingly, where the supplier is unregistered and the recipient is registered, and the recipient is liable to pay tax on the said supply on an RCM basis, the recipient is required to issue an invoice as per Section 31(3)(f) of CGST Act and pay the tax in cash on the same under RCM………

2.6 A combined reading of the above provisions leads to a conclusion that ITC can be availed by the recipient only on the basis of invoice or debit note or other duty-paying document, and as in the case of RCM supplies received by the recipient from an unregistered supplier, the invoice has to be issued by the recipient himself, the relevant financial year, to which invoice pertains, for the purpose of time limit for availing of ITC under Section 16(4) of CGST Act in such cases shall be the financial year of issuance of such invoice only. In cases, where the recipient issues the said invoice after the time of supply of the said supply and pays tax accordingly, he will be required to pay interest on such delayed payment of tax.”

The above clarification fails to appreciate that the liability to pay tax is ascertainable from 13(3) and not prescribed in section 31(3)(f). Section 13(3) hitherto did not clearly specify the due date of raising the self-tax-invoice and assuming it prescribed a due date, RCM liability still emerged on the actual date of raising the invoice. The position continues even after the amendment
as it has only split the scenarios for tax liability between registered and unregistered cases but has not fixed the tax liability to the due date or date of receipt of service.

INTERPLAY WITH THE TIME LIMIT OF SECTION 16(4)

We now move forward for an interesting interplay with input tax credit provisions u/s 16(4) which place an outer time limit for ITC claim as 30th November following the relevant financial year. Section 16(5) has now been inserted vide the Finance Act, 2024 to allow input tax credit retroactively for the financial year 2017–18, 2018–19, 2019–20, and 2020–21 up to 30th November, 2021. While the statute provides for the outer time limit, a more critical aspect that needs attention is when the time to avail of input tax credit actually commences. We would be tempted to scuttle this debate by applying the CBIC Circular 211/5/2024-GST, but a critical analysis will lead to fruitful results. As a first step, let’s lay down the relevant provisions and then map their application in multiple scenarios that have been crafted with small changes in facts.

  • Section 16(2) provides a set of conditions for availment of input tax credit. One of the conditions is that the taxpayer ought to be in possession of a prescribed tax-paying document (Rule 36) and the tax charged in respect of such supply is actually paid to the Government;
  • Rule 36(1)(a) read with section 31(2) makes the Suppliers-RCM-tax-invoice as the relevant tax-paying document in case of RCM supplies from registered persons; Rule 36(1)(b) read with section 31(3)(f) makes the recipients-self-tax-invoice as the relevant tax payment document in respect of RCM supplies from unregistered persons;
  • The condition of payment of tax is subject to section 41 which permits input tax claim on a self-assessment basis and provides for reversal of the same in case the tax is not subsequently paid.
  • However, Rule 36(1)(b) which applies to unregistered RCM supplies states that the self-tax-invoice would be considered as a tax-paying document only ‘subject to payment of tax’ charged on such invoice; Unlike 36(1)(a), RCM-self-invoice is validated only on tax payment;
  • Section 16(4) provides for the time limit upto November 30th following the financial year to which the invoice pertains; Section 16(5) now been permits ITC claims of invoices pertaining to
    2017–18, 2018–19, 2019–20, and 2020–21 up to 30th day of November of 2021;
  • CBIC Circular 211/5/2024-GST has clarified, in the context of an input tax credit on RCM supplies from an unregistered person, that the time limit of section 16(4) should be understood from the financial year in which the self-tax-invoice has been issued by the recipient, even if the said invoice has been raised after its due date i.e. receipt of services. The Circular does not apply to RCM paid against the RCM-tax-invoice issued by registered suppliers in terms of section 13(3) r.w. 31(2).

Now let’s look at the various scenarios with subtle changes to facts:

(a) Case 1 – Recipient voluntarily discharges RCM from registered suppliers pertaining to 2017–18 in 2019–20 (say annual return) and claims the credit before November 2021 (RCM-tax-invoice uploaded in GSTR-1)

ITC was sought to be denied on the ground that the supplier’s invoice date pertains to 2017-18 and the delay in payment of output tax by a recipient cannot entitle the recipient to the benefit of the input tax credit. The time limit u/s 16(4) ought to be calculated from the date of raising the supplier’s RCM-tax-invoice and reporting in terms of Rule 36(1)(a) and hence time-barred. Section 16(4) was being interpreted as linked to section 13(3). While section 16(4) would pose a significant challenge since the invoice was reported in 2017–18, recipients can take shelter u/s section 16(5) and regularize their credit by following the recently issued procedures.

(b) Case 1A – What if the very same Recipient wishes to claim the credit in November 2024?

This is a very weak case, and the recipient may have to develop the argument that the input tax credit time-limit is to be ascertained based on entries in the accounts and the mere delay in reporting the credit in GSTR-3B cannot be termed as time-barred. It would also have to be contended that conditions of section 16(2) for RCM are conditions precedent (subject to Rule 37A) and hence the time limit under section 16(4) cannot be merely extracted based on the date of issue of tax invoice. Extending the rationale adopted in the Board Circular (supra) for RCM belatedly paid in respect of unregistered suppliers, RCM from registered suppliers should also be permitted a similar treatment despite the belated payment by the recipient. Timelines for input tax credit u/s 16(4) are independent of the
timelines in the raising of tax invoices and discharge of RCM tax liability by a registered recipient u/s 13.

(c) Case 2 – Recipient voluntarily discharges RCM from un-registered suppliers pertaining to 2017–18 in 2019-20 (annual return) and claims the credit in November 2021

ITC was sought to be denied on similar grounds above. However, unlike Case 1, the claim of input tax credit is based on the self-tax-invoice which can be raised even in November 2021. Despite the tax payment already being made in 2020, rule 36(1)(b) requires both the invoice and tax payment to be made for the document to be termed as a tax-paying document. Since the invoice ‘pertains’ to the year 2021–22, credit is rightly claimed within the said year.

(d) Case 2A — What if the very same Recipient wishes to claim the credit in November 2024?

The answer would be the same since the ITC claim above emerged from sections 16(4) and 16(5) and need not be relied upon for the input tax credit claim i.e. the relevant year for the ITC claim would be the year of issuance of self-tax-invoice which is issued in November 2024.

(e) Case 3 — Recipient discharges RCM from Registered suppliers (who fail to issue an RCM-tax-Invoice) pursuant to audit/ adjudication (u/s 73) of 2023-24 and claims the credit in November 2024

While the grounds for denial of ITC are the same, the recipient would need to argue that in the absence of a tax-paying document from the registered supplier, the case should be treated in part with a supply from unregistered supplier. In the absence of an RCM-tax-invoice, there is a bonafide belief that the supplier is unregistered and the arguments put forth in Case 2 would then apply to the said case.

(f) Case 3A — What if said recipient is being subjected to 74 proceedings?

Assuming, the proceedings are on account of suppression, etc Section 17(5)(i) would disbar this credit. Since the said section is not applicable for 2024–25 onwards, input tax credit can be claimed on the basis of a self-invoice by treating the same as an RCM from unregistered persons in the year 2024–25.

(g) Case 4 — Recipient discharges RCM of 2017-18 from unregistered suppliers pursuant to audit/ adjudication (u/s 73) and claims the credit in November 2024

Similar to case 2 above, the answer would not change and credit would be available on the basis of section 16(4) read with rule 36(1)(b).

(h) Case 4A — What if the audit/ adjudication has been subjected to 74 proceedings?

The answer would be similar to Case 3A and after omission of section 17(5)(i), the credit would be permissible from 2024–25 based on the generation of a self-tax-invoice in 2024–25 itself.

The above position would continue to be relevant even after the amendments since the time of supply, invoicing, and input tax credit provisions still operate in silos, and due dates specified in invoicing provisions do not have a direct bearing on the time of supply and ITC provisions. Moreover, the relevant year for the issuance of self-invoice u/s 31(3)(f) need not be the same relevant year for a claim of input tax credit on the said self-invoice u/s 16(4).

VALUATION & EFFECTIVE RATE OF TAX

Section 11 (Effective Rate of tax) and 15 (Valuation) have been drafted vis-à-vis a supply. The supplies under RCM provisions would be subject to similar treatment as applicable to regular supplies and liable to the same effective rate of tax and valuation. Typically, going by the parent enactment, one would expect the taxing entries to be a vanilla list of goods or services akin to the HSN schedule. However, there are some aberrations while drafting the taxing entries in Rate/Exemption Notification 11/2017 which as a description of the service includes liability under RCM u/s 9(4) as a pre-condition for the taxing of the said service. But this apart, the law on valuation and rate of tax is similar for both FCM and RCM supplies.

An interesting aspect emerges for the valuation of import of service transactions between related persons under the RCM provisions. Section 15(1) adopted the transaction value (i.e. price paid or payable) where the transacting parties were unrelated. Section 15(4), however, operates independently of section 15(1) in so far as prescribing values for cases that are rejected by section 15(1) (i.e. application of Rule 28). Rule 28 contained a crucial exception that permitted supply of any value to be adopted in cases where the recipient was eligible for full input tax credit. In such cases, the value ‘declared in the invoice’ was the open market value for such supply. Two important questions emerged (a) What if the value itself was not declared in the invoice? (b) Whose invoice was relevant for the purpose of valuation (supplier’s or recipient’s) (c) What if the supplier or recipient declared a value in a different document (say agreement, transfer pricing report, tax audit report, books of accounts, etc) and not on the invoice?

The first aspect has been clearly dealt with by Rule 28 which states that the value declared in ‘invoice’ would be accepted and hence a taxpayer raising a zero-invoice would also be a value. With the support of revenue neutrality principles and CBIC Circular No. 210/4/2024-GST read with 199/11/2023-GST, the valuation could not be questioned. The second aspect involved cases where the related entity would generally be an unregistered supplier (located outside India) and raise a commercial/ transfer price invoice. In terms of section 2(66) r/w 31(3)(f), the relevant ‘invoice’ would be the self-tax-invoice as raised by the recipient. Therefore, it is the declaration in the recipient’s self-tax-invoice that would need to be adopted and tested for the purpose of Rule 28 and not any other commercial document issued by the supplier as they do not have legal recognition. On a close reading of the proviso and aforesaid CBIC Circular, the declaration on the invoice raised by the recipient is important for the purpose of valuation and not the declaration on the invoice raised by the unregistered supplier. This also aligns with the now amended provisions of section 13(3) read with section 31(3)(f) which recognizes only the self-tax invoice as the statutory document and not the supplier’s commercial/transfer price invoice. In this scenario, the department may then take the argument that valuation rules are oriented towards ‘susceptible undervaluation’. Accordingly, where section 15(1) specifies a price that is charged by the foreign unregistered supplier, then the rules cannot undermine the said price. However, this argument fails to appreciate that in the case of related party transactions, the price specified in section 15(1) is totally rejected. Section 15(4) operates in a different domain and does not factor the price as the relevant criteria at all. It only takes into consideration the ‘open market value’ or the ‘comparable price’ which is then subject to the beneficial proviso. The scheme of valuation under the erstwhile Central Excise regime is distinct and the earlier principle of ‘testing’ price infirmities has been discarded. Rule 28 is a declaratory provision and fixes a taxable value dehors the price between related party transactions. As a corollary, values as recognized in other legal documents (such as transfer pricing reports, tax audit reports, etc.) have no consequence on the value as declared in the self-tax invoice raised by the recipient for discharge of the RCM liability on import of service transactions. Can this proposition be tested for secondment arrangements where a cross-charge invoice is raised by the supplier and the recipient is yet to raise a self-tax-invoice for discharge of its RCM liability? Certainly, this is a proposition worth examining as many of these companies are in a cash trap of first discharging RCM in cash and then claiming the very same amount as a refund from the department.

NATURE OF TAX — CGST/SGST OR IGST

IGST enactment identifies the geographical nexus and the type of tax (CGST/SGST or IGST) based on the location of the supplier and the place of supply/location of the recipient. Since section 20 of IGST mandates mutatis mutandis application CGST law, RCM provisions apply in tandem in case of inter-state supplies. The principles of levy stated above apply even in the context of IGST RCM – for eg, a supplier appointing a transporter for the movement of freight from State A to State B could be receiving an inter-state supply and accordingly liable to IGST-RCM u/s 5(3) of IGST Act. In such scenarios, the recipient would have to ascertain the location of the supplier and discharge the appropriate IGST in the state of its registration. The registration status would have to be examined from the state of supply and not in the state of receipt of the services. This assessment must take place independent of the RCM provisions and only after this assessment would one arrive at the conclusion of the Applicable act and accordingly discharge the RCM based on the prevailing enactment and its notification.

WAY FORWARD

RCM has emerged as a detailed subject itself. In comparison to the erstwhile law, the provisions have been well crafted but would need some more nurturing to arrive at the desired result. The provisions should also consider the ever-increasing RCM list and be future-proof for all possible RCM scenarios which taxpayers may be subjected to in the years to come.

Packaged Tours and Place of Supply Provisions under GST

In this article, the author has discussed the place of supply provisions applicable to tour operator’s services of providing “packaged tours”. The legislative history of the amendment to the definition of ‘tour operator’ and changes in the provisions relating to the situs of the service are relevant in interpreting the GST Law, and hence the same are also discussed. Packaged Tours are those tours where the entire tour arrangement, viz planning, organising, scheduling, booking of accommodation, sightseeing, traveling, etc., is done by the tour operator. There can be a “domestic tour” (i.e., Tour in India) or “a foreign tour” (Tour outside India). This article also highlights key observations on extraterritorial jurisdiction in taxing tours conducted outside India.

PLACE OF SUPPLY — INTRODUCTION

The “place of supply” plays a crucial role in deciding the taxability of the supply for the purposes of goods and services tax. As per section 2(86) of the CGST Act, “place of supply” means the place of supply referred to in Chapter V of the IGST Act. The Levy of GST is on the intra-state supply and inter-state supply of goods or services or both. The provisions as to what constitutes intra-state supply or inter-state supply are contained in Chapter IV of the IGST Act, and the ‘place of supply’ is a key element in such a determination. Simply put, in the case of domestic supplies, the ‘place of supply’ decides the appropriate State, and in the case of cross-border transactions, it decides the appropriate country that is entitled to the amount of tax in respect of the subject transaction.

Coming to the service transactions, both the definitions viz. “import of services” [Section 2 (11)] and “export of services” [Section 2(6)] under the provisions of the IGST Act have a reference to ‘place of supply’, and hence taxability of service transaction cannot be completed without examining the place of supply provisions.

Chapter V of the IGST Act, sections 10 and 11 deal with the supply of goods, and sections 12 and 13 deal with the supply of services. Section 12 is applicable when the location of the supplier and recipient is in India (i.e., domestic supply), and Section 13 is applicable when the location of the supplier or location of the recipient is outside India. (i.e., cross-border supply). In this background, let’s discuss the place of supply provisions in the case of Tour Operator Services.

LEGISLATIVE HISTORYTOUR OPERATOR

The tour operator service was brought into service tax net on 1st September, 1997, where the scope of service was limited to providing the service of ‘touring’ (i.e., undertaking a journey from one place to another irrespective of the distance) that is conducted in a tourist vehicle covered by a tourist permit granted under the Motor Vehicle Act. In the year 2004, the scope of service was enhanced to cover two types of services: (i) business of planning, scheduling, organizing or arranging tours (which may include arrangements for accommodation, sightseeing, or other similar services) by any mode of transport and (ii) person engaged in the business of operating tours in a tourist vehicle covered by a tourist permit. Later on, in 2008, the scope of the second part was expanded to include a tour by any contract carriage.

In the year 2012, with the introduction of negative list-based taxation, the ‘reference to type of vehicle’ in the second part of the definition was altogether deleted, and hence, the second part simply read as a person engaged in the business of operating tours. A broad comparison of Tour operator services under Positive List based taxation, Negative List based taxation, and GST regime is given below:

Positive List-based Taxation Negative List-based Taxation GST

[(115) “tour operator” means any person engaged in the business of planning, scheduling, organizingor arranging tours (which may include arrangements for accommodation, sightseeing or other similar services) by any mode of transport, and includes any person engaged in the business of operating tours in a tourist vehicle or a contract carriage by whatever name called, covered by a permit, other than a stage carriage permit, granted under the Motor Vehicles Act, 1988 (59 of 1988) or the rules made thereunder.

Explanation. — For the purposes of this clause, the expression “tour” does not include a journey organized or arranged for use by an educational body other than a commercial training or coaching center, imparting skill or knowledge or lessons on any subject or field;]

arranging tours (which may include arrangements for accommodation, sightseeing or other similar services) by any mode of transport and includes any person engaged in the business of operating tours.

Para 2(c) of Notification No.26/2012-ST

arranging tours (which may include arrangements for accommodation, sightseeing or other similar services) by any mode of transport and includes any person engaged in the business of operating tours.

Entry 23 of Notification No.8/2017-IT(R)

 

In COX & KINGS INDIA LTD. vs COMMISSIONER OF SERVICE TAX, NEW DELHI 2014 (35) STR 817 (Tri. — Del. [10th December, 2013], Hon’ble Tribunal took the view that the definition of Tour Operator in 2004 onwards has two facets:

(i) the generic facet of engagement in the business of planning, scheduling, organizing or arranging tours (which may include arrangements for accommodation, sightseeing or other similar services) by any mode of transport; and

(ii) the specific component, brought into the definition by the inclusionary clause where a person engaged in the business of operating tours in tourist vehicles, covered by a permit granted under the Motor Vehicles Act, 1988 or the rules made thereunder, would also be a “tour operator”.

It further held that the generic facet of the definition does not, however, include the business of operating tours by any mode (i.e., all modes) of transport. Contours of the expression (in the generic facet) are clearly limited to the business of planning, scheduling, organizing or arranging, etc., but exclude the operation of tours. The Hon’ble Court inferred this to be the only permissible meaning of the amended definition since if the generic facet of the definition includes operating tours as well; there was no necessity for the second and specific facet spelled out in the definition, namely operating tours in a tourist vehicle covered by a permit granted under the Motor Vehicles Act, 1988, or the rules made thereunder.

As regards what constitutes the operating of tours, the Hon’ble Tribunal observed that when the facilities provided by tour operators include providing a tour leader to accompany the touring party throughout the tour, besides scheduling the tour package, operating the packaged tour, fixing the probable dates and venues, the itinerary; booking accommodation in hotels at foreign locations; planning and arranging travel through various modes in foreign locations; sightseeing, boarding and lodging abroad; providing foreign guides, air ticketing and arranging visa and travel insurance, etc. — such activities clearly comprise operating the tour, in addition to planning, scheduling, organizing or arranging the tour.

In light of the above legislative history, the author is of the view that the definition of Tour Operator under the GST regime also contains the aforesaid two facets viz (i) arranging or facilitating the tour and (ii) operating the tour. In Heena Enterprises vs. CCE & S.T.-SURAT-I [ 2024-VIL-1177-CESTAT-AHM-ST], the Hon’ble Tribunal, while examining the provisions under positive list-based taxation regime, has considered the activities of Planning, Scheduling, Organising And Arranging a tour are in the nature of ‘intermediary services’ and hence the destination of ‘tour’ is not relevant. The argument of the appellant that since the tour is conducted in J&K, the activities are performed in J&K was not accepted by the Tribunal, stating that the tax is not on tour but on the activities and the activities of arranging and organizing are performed outside J&K. The Tribunal concluded that the appellant is not performing the second part of undertaking the tour in a tourist vehicle.

The author is of the view that the activities contemplated in the former part are more in the nature of intermediary services, whereas the activities contemplated in the latter part are broader in scope and are activities conducted on a principal-to-principal basis. Thus, when the activities mentioned in the first part are combined with the obligation of operating the tour, the status of such composite activities carried out by the tour operator changes from intermediary activities to activities carried on one’s own account.

SITUS OF SERVICES

POSITIVE LIST-BASED TAXATION REGIME

In the positive list-based taxation regime (i.e., prior to 1st July, 2012), ‘tour operator services’ fell under Rule 3(1)(ii), i.e., performance-based services. As per Export of Service Rules, where the taxable service is partly performed outside India, it shall be treated as performed outside India. Similarly, Taxation of Services (Provided from Outside India) Rules 2006 provided that where such services are partly performed in India, they shall be treated as performed in India, and the value of such taxable service shall be determined u/s 67 and rules made thereunder. In this regard, Rule 7(2) of the Service Tax (Determination of Value) Rules, 2006, provided that total consideration paid by the recipient for such services, including the value of services partly performed outside India, will be treated as the value of taxable services. Thus, prior to 1st July, 2012, the situs of ‘tour operator services’ was based on the “performance of services”, i.e., “from where the services are provided” and “where the services are used/ received”.

In COX & KINGS INDIA LTD.’s case (supra), the issue involved before the Tribunal was with respect to the taxability of outbound tours (i.e., tours arranged for Indian tourists outside India and performed entirely outside India). The case of the assessee was that Service Tax is a destination-based consumption tax, and consumption of service in respect of outbound tours being outside India, no Service Tax is leviable. Hon’ble Delhi Tribunal, without going into the provisions of Export of Service Rules, took the view that services provided and consumed outside taxable territory would not amount to a taxable service under the provisions of the Act. It was further stated that when the tour is conducted partly in India and partly outside India, there is an obligation to apportion the consideration to that part of the service which is provided and consumed outside the territorial limits.

NEGATIVE LIST-BASED TAXATION REGIME

In the negative-list-based taxation regime (i.e., from 1st July, 2012), Section 66C was enacted to decide the ‘place of provision of services’. Accordingly, the Place of Provision of Service Rules, 2012 (PoPS Rules) were enacted. Rule 4 dealt with the Place of provision of performance-based services. Rule 4(b) read as under:

The place of provision of the following services shall be the location where the services are actually performed, namely:
(b) services provided to an individual, represented either as the recipient of service or a person acting on behalf of the recipient, which requires the physical presence of the receiver or the person acting on behalf of the receiver, with the provider for the provision of the service.

However, Rule 7 provided that where any service referred to in Rules 4, 5, or 6 is provided at more than one location, including a location in the taxable territory, its place of provision shall be the location in the taxable territory where the greatest proportion of the service is provided. Further, Rule 8 provided that where the location of the provider of service, as well as that of the recipient of service, is in the taxable territory, the place of provision shall be the location of the recipient of service. Rule 14 further provided that where the provision of a service is, prima facie, determinable in terms of more than one rule, it shall be determined in accordance with the rule that occurs later among the rules that merit equal consideration.

Rule 9 provided that the place of supply of intermediary services shall be the location of the service provider. The term “intermediary” is defined in Rule 2(f) of the POPS Rules as under:

“intermediary” means a broker, an agent, or any other person, by whatever name called, who arranges or facilitates a provision of a service (hereinafter called the ‘main’ service) or a supply of goods, between two or more persons, but does not include a person who provides the main service or supplies the goods on his account;]

According to the author, Rule 9 would become applicable only where the tour operator is not engaged in the business of operating tours and is only engaged in arrangements and facilitation services. However, in the case of composite tours, where operation is an integral part, Rule 9 would not become applicable, and Rule 4, i.e., performance-based services, will cover the activities.

In the Service Tax Education Guide Issued by CBE & C. dated 19th June, 2012, while giving illustrations of intermediary services, reference was made to “Tour Operator services”. The author is of the view that the education guide did not eliminate the possibility of Tour operators falling into performance-based services but merely expressed the other possibility of qualifying them as intermediary services based on the facts of the case. The characterization of Tour Operator Services as ‘performance-based services’ finds its authority in the decision of the Hon’ble Apex Court in the case of ALL INDIA FEDN. OF TAX PRACTITIONERS vs. Union of India 2007 (7) STR 625 (SC) [Para 8]. The Education Guidance Note, while explaining the scope of Rule 4(b) of the POPS rules, emphasized the two crucial aspects viz:

(i) The nature of services covered here is such as are rendered in person and the receiver’s physical presence, i.e., service in this category is capable of being rendered only in the presence of an individual

(ii) the individual can be either the service receiver himself or a person other than the receiver who is acting on behalf of the receiver.

The business of operating tours satisfies the above conditions. The place of performance and place of consumption, in this case, is the same.

As per Rule 6A of the Export of Service Rules (inserted from 1st July, 2012), for a service to qualify as ‘export of service’, it was necessary that the place of supply of the said service falls outside India. Besides, the concept of ‘location of service provider’ and ‘location of service receiver’ was introduced. Hence, in the case of falling under Rule 7 (where part performance was in India ) or Rule 8 (where both service provider and service receivers were in India) and under Rule 9, where the Tour Operator was located in India, the outbound tours (i.e., tours conducted outside India) became taxable. This was contrary to principles of export contained in a positive-based taxation regime, where performance outside India and part-performance outside India were both treated as exports of services. The matter, therefore, came up before the Hon’ble Delhi High Court in the case of INDIAN ASSOCIATION OF TOUR OPERATORS vs UOI 2017(5) GSTL 4 (Del) [31st August, 2017] seeking a declaration that Rule 6A of the Service Tax Rules, 1994 concerning ‘Export of services’ is ultra vires the Finance Act 1994 (‘FA’). The validity of Section 94(2)(f) of the FA was also challenged on the ground that it gives unguided and uncontrolled power to the Central Government to frame rules regarding ‘provisions for determining export of taxable services’. The Hon’ble Court held as under:

“46. As already noticed, Rule 6A(1)(d) treats even services provided outside the taxable territory, i.e., where the place of provision of service is outside India, as an export of ‘taxable’ service. Since such service by virtue of Section 66B read with Section 65(51) and (52) read with Section 64(1) and (3) of the FA is not amenable to Service Tax in the first place and is therefore not ‘taxable’ service, Rule 6A is ultra vires the FA. Even Section 94(2)(hh) of the FA permits the central government to determine when there would be an export of ‘taxable service’ and not ‘non-taxable service.’ Something which is impermissible under the FA cannot, by means of the rules made thereunder, be brought within the net of service tax.”

Having regard to the composite nature of services provided by Tour Operators, the Hon’ble Court in Para 51 and 52 of the judgment emphasized the need for having machinery in the statute itself, in case of taxability of composite services, by which it can be determined with some certainty as to how much of the composite service can be said to be rendered in the taxable territory and of what value for the purposes of levy and collection of tax. It further held that If there is no such machinery provided, that would be an additional ground for invalidation of the levy itself.

Later on, by virtue of Notification No.6/2014-ST dated 11th July, 2024, the amendment was made to the Mega Exemption Notification No.25/2012-ST dated  20th June, 2012, and the following entry was inserted.

“42. Services provided by a tour operator to a foreign tourist in relation to a tour conducted wholly outside India.”

Consequently, the outbound tours provided to foreign tourists were exempted.

As regards service provided by any person located in non-taxable territory to a person located in the taxable territory (i.e., inbound tours), Rule 2(1)(G) read with Para (I)(B) of Notification No.30/2012-ST dated 20th June, 2012 provided that if services provided are ‘taxable services’, then the liability to pay 100 per cent service tax shall be on the service receiver. Thus, in the case of inbound tours, where the performance of the tour was in India, but the service provider was located outside India, the intermediary services were outside the purview of service tax. As regards performance-based services for tours conducted in India and service providers located outside India, the exemption was provided under Entry 34 of the Mega Exemption Notification if such services are provided to the following persons:

(a) Government, a local authority, a governmental authority or an individual in relation to any purpose other than commerce, industry, or any other business or profession;

(b) an entity registered under section 12AA of the Income-tax Act, 1961 (43 of 1961) for the purposes of providing charitable activities; or

(c) a person located in a non-taxable territory:

In other cases, liability under RCM was triggered.

GST PROVISIONS

(a) Section 12 — When the service provider and Service Receiver both are in India.

The provisions of POPS Rules are parimateria with the place of supply provisions contained in Section 12 and Section 13 of the IGST Act. Rule 7 is parimateria with Section 12, which provides that when both the service provider and service receiver are in India, there is no escape from taxation. Section 12 has further developed it to determine the right of a particular State to claim the tax. However, in section 12, only the following services are treated as performance-based services

– restaurant and catering services

– personal grooming, fitness, beauty treatment, and health service including cosmetic and plastic surgery

Further, no specific provision is made to cover ‘intermediary services’. Thus, when it comes to ‘tour operator services’ falling under section 12 of the IGST Act (i.e., where both service provider and service receiver are in India), in the absence of applicability of sub-section (3) to (14) of section 12 of the IGST Act, the general provision under section 12(2) becomes applicable.

(b) Section 13 When a service provider or service receiver is outside India.

In respect of tour operator services covered under Section 13 of the IGST Act, performance-based services are covered under Section 13(3)(b) and Intermediary Services are covered under Section 13(8) (b) of the IGST Act. The provisions of Section 13(3)(b) are parimateria with provisions of Rule 4(b) of the POPS Rules, and provisions of Section 13(8)(b) are parimateria with Rule 9 of the POPS Rules. However, it’s necessary to discuss what constitutes performance, especially in the case of a composite supply of services, for it may be the case where activities like planning, scheduling, arranging, booking, etc., may be performed by the Indian tour operator from India, the actual tour may be conducted abroad.

The recent Notification No.4/2022 — ITR dated 13th July, 2022 gives us some guidance in this matter. It provides that Tour operator service, which is performed partly in India and partly outside India, supplied by a tour operator to a foreign tourist, is exempt to the extent of the value of the tour operator service which is performed outside India. It further provides that the value of the tour operator service performed outside India shall be such proportion of the total consideration charged for the entire tour which is equal to the proportion which the number of days for which the tour is performed outside India has to the total number of days comprising the tour, subject to 50 per cent of the total consideration charged for the entire tour. Hence, the author is of the view that in the case of composite services, the performance of the tour is to be seen from the number of days the tour is conducted abroad or in India. In Para 54 and 54A, the expression ‘tour conducted wholly outside India’ and the ‘number of days for which the tour is performed outside India’ are used in the same sense.

Thus, depending upon the nature of services — ‘intermediary services’ or ‘performance-based service’, and the location of the service provider and receiver, the situs is determined as under:

Section Location of Service Provider Location of Service Receiver Destination of Tour Place of Supply
Note 1
13(3)(b) — Inbound Tour India Outside India India India
13(8)(b) — Inbound Tour India Outside India India India
Note 2
13(3)(b) — Inbound Tour Outside India India India India
13(8)(b) — Inbound Tour Outside India India India Outside India
Note 3
13(3)(b) — Outbound Tour India Outside India Outside India Outside India
13(8)(b) — Outbound Tour India Outside India Outside India India
Note 4
13(3)(b) — Outbound Tour Outside India India Outside India Outside India
13(8)(b) — Outbound Tour Outside India India Outside India Outside India

 

Note 1: When a Tour operator in India is providing services to Foreign tourists in respect of Tours conducted in India, the place of supply u/s 13(3)(b) as well as u/s 13(8)(b) will be India. Such services will be liable to tax in India as there is no exemption in respect of such tours. Similarly, if a Tour operator in India is providing services to a Foreign Tour Operator ( FTO) in respect of tours conducted in India, his services would attract GST in India. In the opinion of the author, applying section 13(2) of the IGST Act may not be correct in such a case, as there is no legislative intention to exclude tours conducted in India outside the purview of GST merely because service recipients are located abroad. The exemption Entry no. 54 and 54A fortifies this view as the exemption granted under these entries is only limited to tours conducted/ performed abroad.

Note 2: It’s rare to expect a Foreign Tour Operator (FTO) to provide service to Indian Tourists in connection with Tours conducted in India that would fall under section 13(3)(b) of the IGST Act. It may, however, happen that FTO may take bookings from foreign Tourists in connection with Tours conducted by an Indian Tour Operator in India and are paid a commission by an Indian Tour Operator (as service receiver). In such cases, the services provided by FTO will be in the nature of intermediary services, and hence the place of supply would be outside India u/s 13(8)(b).

Note 3: In case the Indian Tour Operator has foreign tourists as a customer for tours conducted abroad, services provided to them would be regarded as “export of services” as a place of supply of services would be abroad both u/s 13(3)(b). However, u/s 13(8)(b), the place of supply would be India. In such a case, the services will be exempted from GST by virtue of Entry No.54 and 54A of Notification No.9/2022-ITR, being tour operator services provided to foreign tourists in respect of tours conducted abroad.

Note 4: In the case of outbound tours, Indian Tour Operators often enter into contracts with FTOs for the purpose of making tour-related arrangements for conducting foreign tours abroad. The contract can be of two types, viz (i) where the FTO merely acts as an intermediary by arranging the bookings of accommodation, local travel, arranging local guide, sightseeing etc, leaving the responsibility of operating the tour with Indian Tour Operator by deputing his own people or by hiring third party services (ii) where entire foreign tour operations are outsourced to FTO and FTO operates the foreign tour by providing composite services to Indian Tour Operator (by attending to latter’s customers when they come on tour abroad). The former case falls u/s 13(8)(b), and the latter falls u/s 13(3)(b) of the I.G.S.T. Act. However, in both cases, the place of supply will be outside India for both the performance as well as the location of the service provider will be outside India. Therefore, in the opinion of the author, such services, therefore, would not be regarded as “import of services” u/s 2(11) of the IGST Act to attract GST under reverse charge in the hands of Indian Tour Operator. It’s understood that in such cases, the GST department in some cases has issued show cause notices to Indian Tour Operators by treating the place of supply as India in terms of section 13(2) — i.e., location of the service recipient. The author is of the view that applying provisions of section 13(2) to tour operator service would give absurd results as the cases covered under Note 1 would be regarded as ‘export of service’, although the whole tour is conducted in India, which is contrary to the legislative intent if the entire history of tour operator service is taken into account.

CONCLUDING THOUGHTS

Lastly, when one argues that the tour operator services are performance-based services or intermediary services, the reference is drawn to the decision of the Hon’ble Supreme Court in the case of ALL INDIA HAJ UMRAH TOUR ORGANIZER ASSOCIATION MUMBAI vs. UOI 2022 (63) GSTL 129 (SC) [26th July, 2022] wherein the Hon’ble Court expressed a view that services provided by HGOs in India to Huj Pilgrims in India would not be covered into performance-based services so as to apply rule 4(b) of the POPS Rules. In the opinion of the Author, this cannot be treated as an authority or ratio decidendi for the determination of place of supply in the case of tour operator service, especially since the issue before the Court in the said case was the applicability of Exemption Entry 5A of Mega Exemption Notification No.25/2012-ST (or as the case may be Entry 63 of the IGST Exemption Notification) relating to Services by a specified organization in respect of a religious pilgrimage and its vires in the light of Article 14 of the Constitution of India. The issue before the Court was not regarding the determination of the place of supply. Further, from the scope of services examined in Para 38 of the said judgment, the Hon’ble Court observed that the services were more in the nature of making arrangements, and it’s in that context the Court expressed a view that such services cannot be treated as performance-based services. It’s also apposite to note that the Hon’ble court was considering a case where Indian HGOs were service providers in India and Haj pilgrims were recipients in India; hence, the location of the service provider as well as the location of the service recipient was in India. The Hon’ble Court, therefore, referred to rule 8 of the POPS Rules and held that the place of provision of service is the location of the recipient of service. It may be relevant to note that the Court specifically recorded that it is not going into the issue of extra-territorial operations of the laws relating to service tax, and the said issue is left open. The Court also did not go into the question of the validity of POPS rules. In this background and having regard to the decisions of COX & KINGS INDIA LTD and INDIAN ASSOCIATION OF TOUR OPERATORS, it would be interesting to see whether imposing tax in respect of services provided to Indian customers for tours conducted outside India in terms of section 12(2) of the IGST Act, can be said to be having extra-territorial jurisdiction.

Goods And Services Tax

I SUPREME COURT

48 Commissioner of CGST vs. Deepak Khandelwal

[2024] 165 taxmann.com 715 (SC)

Dated: 14th August, 2024

Hon’ble Supreme Court dismissed the SLP filed by the department against the Order of Hon’ble High Court in the case of Deepak Khandelwal vs. Commissioner 2023 (77) G.S.T.L. 5 (Del.)

OBSERVATIONS OF DELHI HIGH COURT—

During the course of the search under sub-section (2) of section 67 of the CGST Acts, 2017 (the Act), the officer conducting the search may find various types of movable assets such as furniture, computers, communication instruments, air conditioners, etc. Those assets although falling under the definition of ‘goods’ cannot be seized, if the proper officer has no reason to believe that those goods are liable to be confiscated. The word ‘goods’ as defined under sub-section (52) of section 2 of the Act is in wide terms, but the said term as used in section 67 of the Act, is qualified with the condition of being liable for confiscation. Thus, only those goods, that are the subject matter of, or are suspected to be the subject matter of evasion of tax, can be seized and confiscated. It was also held that section 67(2) of the Act makes it amply clear that documents books or things may be seized if the proper officer is of the opinion that it shall be useful or relevant to any proceedings under the Act. The words “useful for or relevant to any proceedings under the Act” control the proper officer’s power to seize such items. To further clarify, the documents or books or things seized are required to be retained only for so long as it may be necessary “for their examination and for any inquiry or proceedings under the Act”. Once the said purpose is served, the books or documents or things seized under sub-section (2) cannot be restrained and are required to be released.

The department filed an SLP against the above Order of the High Court. However, the Supreme Court found it not to be a case of interference and therefore dismissed the SLP.

II HIGH COURT

49 Kannan Mahalingam vs. Commissioner of GST & Central Tax

(2024) 22 Centax 42 (Mad.)

Dated: 16th September, 2024

Order denying ITC on the ground of belated availment under section 16(4) was remanded back for fresh adjudication- considering the amendment proposed in Finance (No. 2) Bill, 2024.

FACTS

Petitioner was issued an Order-In-Appeal for the year 2018-19 confirming demand on account of delayed availing of Input Tax Credit (ITC) in violation of section 16(4) of the GST Act. Hence, the appeal.

HELD

Without going into merits, the High Court remanded the matter back to the Adjudicating Authority directing that a fresh order be passed after considering the amendments proposed in the Finance (No.2) Bill, 2024 addressing issues pertaining to a time limit for availing ITC under section 16 of the GST Act.

[Author’s comments: A similar view has also been taken by Cal. HC in the case of North Land Construction vs. State of West Bengal (2024 22 Centax 125 dated 20th August, 2024].

50 Baazar Style Retail Ltd vs. Deputy Commissioner of State tax

(2024) 22 Centax 99 (Cal.)

Dated: 19th August, 2024

Parallel proceedings cannot be initiated on the same subject matter for the same tax period.

FACTS

Petitioner was initially issued an SCN by Central Tax Authorities dated 30th September, 2022 for the period March 2019 to May 2019, against which the response was duly submitted. Subsequently, State Authorities i.e. respondent issued a SCN dated 27th December, 2023 and passed an impugned order dated 27th April, 2024 for the tax period F.Y. 2018–19 on the same subject matter. Being aggrieved by the same, the petitioner challenged the SCN issued by the respondent stating that Central Tax authorities had already initiated proceedings for the same tax period and subject matter which was duly participated.

HELD

High Court quashed SCN and a subsequent order was issued by the respondent by referring to section 6(2)(b) of the WBGST Act which prevents parallel proceedings by Central and State authorities for the same tax period and subject matter. Thus, the order passed was set aside. However, discretion was given to the respondent for issuing SCN for matters not covered by Central Authorities in an earlier SCN dated 30th September, 2022.

[Author’s comments: A similar view had been taken by Calcutta HC in the case of R.P. Buildcon Pvt. Ltd. versus Superintendent, CGST and Central Excise (2022) 1 Centax 284 (Cal.) dated 30th September, 2022 and Gauhati HC in case of Subhash Agarwalla versus State of Assam (2024) 15 Centax 482 (Gau.) dated 12th February, 2024.]

51 BGR Energy system Ltd vs. State of U.P

(2024) 21 Centax 287 (All.)

Dated: 29th July, 2024

The order passed without considering the petitioner’s request seeking additional time to respond due to ongoing CIRP proceedings was unsustainable.

FACTS

The petitioner was undergoing the Corporate Insolvency Resolution Process (CIRP) under the supervision of an Interim Resolution Professional (IRP). During this period, the respondent issued a SCN dated 10th April, 2024 under section 73 of the UPGST Act, against which the petitioner submitted a partial response on 12th April, 2024. Petitioner further informed respondent about ongoing CIRP and requested time to seek permission from the IRP to properly contest the proceedings. However, IBC proceedings were discontinued vide an order passed by NCLAT, dated 15th April, 2024. Respondent passed an impugned order dated 26th April, 2024 without granting any further opportunity for a personal hearing. Being aggrieved by the same, the petitioner preferred a writ petition, before this Hon’ble High Court.

HELD

High Court observed that once petitioner was undergoing CIRP and this fact was communicated to respondent, respondent should not have passed the impugned order during the pendency of the insolvency proceedings. The Court further noted that the order was passed without providing any opportunity of being heard. Hence, the Court directed the respondent to allow the petitioner to file a detailed reply to the show cause notice and the respondent to conduct fresh adjudication after providing the opportunity of being heard.

52 Kumar Cargo Solution vs. State of U.P.

(2024) 21 Centax 354 (All.)

Dated: 2nd May, 2024.

Penalty cannot be imposed under section 129 of CGST Act merely due to delayed presentation of e-invoice where there was no intention to evade payment of tax.

FACTS

Petitioner’s vehicle as well as goods was detained under section 129 of the CGST Act, merely due to the absence of an e-invoice available at the time of seizure. The petitioner downloaded the e-invoice and presented it on the same day. Further, an order imposing a penalty was passed against the petitioner. Being aggrieved by such detention, the petitioner filed a writ petition challenging the detention of its vehicle and goods by the respondent.

HELD

High Court held that no penalty could be imposed in the absence of any intention to evade payment of tax. Further, even if the petitioner did not possess an e-invoice at the time of seizure, it was submitted later on the very same day. Therefore, the Court set aside an impugned order dated 20th July, 2024 imposing penalty without any evidence of intent to evade payment of tax.

53 N.H. Lubricants vs. State of Rajasthan

(2024) 21 Centax 399 (Raj.)

Dated: 25th July, 2024

Writ jurisdiction cannot be exercised in cases involving factual disputes where there is no question of jurisdiction nor is there a violation of natural justice.

FACTS

Respondent issued an order demanding reversal of ITC alleging that the supplier firm was fake or non-existent and had not made the payment of tax. Being aggrieved by such demand, the petitioner filed a writ petition challenging an order for reversal of ITC under section 16 of CGST Act, 2017 stating that the respondent should have first pursued recovery from the supplier before proceeding against the petitioner.

HELD

The High Court, without going into the merits of the case, held that the existence of the supplier firm or its genuineness is a factual dispute. Accordingly, writ jurisdiction should not be exercised in cases when there is no jurisdictional issue or violation of principles of natural justice. The court further distinguished the judgments relied upon by the petitioner in its response. Thus, a petition was dismissed, with the Court emphasizing that the petitioner to avail alternative remedy and file an appeal within three months of the receipt of the order.

54 Mitali Shah vs. State of West Bengal

(2024) 21 Centax 407 (Cal.)

Dated: 8th July, 2024

The opportunity of being heard cannot be denied and the appeal ought to be decided on merits where the petitioner could not respond to SCN and subsequent order, since the same were not uploaded on the designated portal section.

FACTS

The petitioner was issued SCN and the subsequent order was uploaded in the “view additional notices and orders” section ex-parte of the GST portal. The petitioner challenged an adjudication order under the GST Act before the Hon’ble High Court.

HELD

High Court found that the SCN and the order were not properly served through the designated portal section. Also, there was confusion regarding the uploading of SCN and passing of the order due to which the petitioner was unable to submit an appropriate response. The Court disposed of the writ while directing the appellate authority to condone the delay in filing the appeal and pass a reasoned order on merits.

55 Parmar Sandip Chamanbhai vs. State of West Bengal

[2024] 166 taxmann.com 32 (Calcutta)

Dated: 12th August, 2024.

If the petitioner complies with the Court’s order regarding partial payment of a penalty and provides bank security for the remaining amount as per the said Order, their right to appeal becomes fully established. This right cannot be revoked by the department due to a failure to make additional pre-deposits as specified in section 107(6) of the Act.

FACTS

The petitioner had challenged the Order passed under section 129(3) of the CGST Act which the Hon’ble Court disposed off by allowing the petitioner the liberty to file an appeal, subject to the condition that the petitioner makes payment of a sum of ₹10 lakhs within a period of 10 days and files proof of such payment along with the bank guarantee for the balance amount of penalty in question. The petitioner had since secured the entire penalty amount as determined under section 129 and had the goods released upon executing a bond. In light of these facts, the petitioner once again approached the Hon’ble Court, requesting for the release of the bank guarantee of ₹5,22,500 so that the same could be utilized for making the payment of pre-deposit for preferring the appeal, which is a sum equal to 25 per cent of the penalty determined under section 129(3) of the WBGST/CGST Act, 2017.

HELD

Hon’ble Court refused to give a refund of ₹5,22,500 to the petitioner. However, it held that the moment the petitioner made the payment of ₹10 lakhs and caused the bank guarantee to be executed in terms of the earlier Court order, the right of the petitioner to prefer an appeal crystallized into a full-fledged right which can neither be taken away nor can the respondent called upon the petitioner to make payment for any additional amount in terms of the proviso to section 107(6) of the said Act. It further held that authorities cannot withhold the right of the petitioner to prefer an appeal against the order passed under section 129(3) of the Act, interalia, on the ground that the petitioner has not made a further pre-deposit of 25 per cent of the determination already made under section 129(3) of the Act.

56 Subodh Enterprises vs. Union of India

[2024] 166 taxmann.com 363 (Andhra Pradesh)

Dated: 5th August, 2024.

Under provisions of the Official Language Act, 1963 and Rules framed thereunder, any communication of a Central Government office are required to be normally in both Hindi and English. However, any communication from a Central Government office to any person in region ‘C’ shall be in English. Hence, service of the order passed by the Commissioner (Appeals) only in Hindi language is not permissible.

FACTS

The petitioners approached to Hon’ble Court challenging the non-furnishing of the English translation of the hand-written orders passed by the Commissioner (Appeals) in Hindi language. The Commissioner (Appeals) defended the petition stating that Article 343 of the Constitution of India provided that “Hindi in Devanagari Script” with international form of Indian Numerals is the official language of the Union of India and that under Article 344 of the Constitution of India Official Languages Commission, has recommended for the progressive introduction of Hindi for official purposes. It was further stated that presidential order dated 2nd July, 2008 required 20% of the work to be carried out in Hindi, in regions categorized as ‘C’ region and hence the Commissioner (Appeals) is following the said orders as out of a total 619 orders issued by him only 113 orders are issued in Hindi language.

HELD

The Hon’ble High Court noted that a Committee consisting of Members of Parliament was appointed under Clause 4 of Article 344 to examine the recommendations of the Commission constituted under Article 344 in relation to a complete changeover to Hindi by 26th January, 1965. This Committee, after considering the views expressed by various persons, had expressed its opinion that a complete changeover to Hindi, by 26th January, 1965 was not practical and that a provision should be made, in pursuance of Article 344 (4) of the Constitution, for continued use of English, even after 1965 for the purposes to be specified by the Parliament, by law, as long as may be necessary. This approach was accepted by the Government and the Official Language Act, 1963 (hereinafter referred to as ‘the Act’) was enacted.

The Hon’ble Court noted that as per section 3 of the said Act, English language shall continue to be used in addition to Hindi. Further, as per Rule 6 of the Official Language (Use for Official Purposes of the Union) Rules, 1976, both Hindi and English shall be used for all documents referred to in section 3(3) of the Act and it shall be the responsibility of the persons signing such documents to ensure that such documents are made, executed or issued both in Hindi and in English. Further, Rule 3(3) of the Rules stipulates that communications from a Central Government office to a State or Union territory in region ‘C’ or to any office (not being a Central Government office) or person in such State shall be in English.

Relying upon the above, it was incumbent upon the Commissioner (Appeals), to either serve a copy of the order passed by him in English or to serve copies of the orders passed by him in both Hindi and English. Consequently, service of the order passed by the Commissioner (Appeals) only in Hindi language is not permissible.

57 [Rekha S. vs. Assistant Commissioner

2024] 166 taxmann.com 289 (Madras)

Dated: 19th December, 2023.

The Court set aside the Order passed against the deceased person. However, taking into consideration the request made by the department, the petitioners were directed to file a response to the show cause notices issued by the department to the said deceased persons before passing the said impugned Order.

FACTS

The petitioners are the legal heirs of the deceased M. K. Girish, who was running a business as a sole proprietor. The said M. K. Girish passed away on 25th January, 2021, and the same was intimated to the respondent by way of an online application dated 29th June, 2022. Despite this, GST DRC-01A dated 6th July, 2022, and GST DRC-01 dated 21st November, 2022 was issued by the respondent in the name of deceased M.K. Girish. Thereafter, the aforesaid impugned assessment order was also passed by the respondent on 1st March, 2023 against the deceased person. Therefore, a writ petition was filed by the heirs contending that the said assessment order is liable to be set aside since the said proceedings were initiated against a deceased person. The department accepted the position but requested the Court that the said notices be treated as notice to all the petitioners, who are the legal heirs of M.K. Girish.

HELD

The Hon’ble Court held that since the impugned assessment order came to be passed against the deceased person, which is non-est in law, it is liable to be set aside. However, the Court directed petitioners to file a reply to notices issued

58 Ketan Stores vs. State of Gujarat

[2024] 166 taxmann.com 258 (Gujarat)

Dated: 9th August, 2024.

Detailed order specifying the basis of the summary order should also be issued along with the summary order. Hence, merely issuing a summary of order DRC-07 without a basis of summary could not be sustained and should be quashed.

FACTS:

The petitioner received a notice of provisional attachment of a bank account against the recovery initiated vide a summary order. The said summary of the order in Form GST DRC-07 related to discrepancies between GSTR-3B and GSTR-2A. The assessee contended that no detailed order existed, which formed the basis for the summary of an order issued in Form GST DRC-07, and that he was unable to decipher the conclusive figures in the summary of an order issued.

HELD:

The Hon’ble Court quashed the summary order and set aside the bank attachment holding that in the absence of any order for which a summary order was issued, the summary order and recovery proceedings cannot be sustained.

Recent Developments in GST

A. NOTIFICATIONS

i) Notification No.16/2024-Central Tax dated 6th August, 2024

The above notification seeks to make sections 11 to 13 of the Finance Act (No.1) 2024 operative. The sections 11 & 12 which are regarding provisions of Input Service Distributor (ISD), are to come into effect from 1st April, 2025. Section 13, which is relating to penalty under section 122A, is to come into effect from 1st October, 2024.

ii) The Finance (No.2) Act, 2024 (Act No.15 of 2024), in which amendments proposed in the Budget are incorporated, is assented to by the president on 16th August, 2024, and accordingly the Act has come into operation from 16th August, 2024.

B. CIRCULARS

The following circulars have been issued by CBIC.

(i) Clarification about advertising services — Circular no.230/24/2024-GST dated 11th September, 2024.
By the above circular, clarifications are given in respect of advertising services provided to foreign clients.

(ii) Clarification regarding ITC on demo vehicles — Circular no.231/25/2024-GST dated 11th September, 2024.
By the above circular, the position regarding the availability of input tax credit in respect of demo vehicles is clarified.

(iii) Clarification regarding the place of supply — Circular no.232/26/2024-GST dated 11th September, 2024.
By the above circular, clarifications are given in place of the supply of data hosting services, provided by service providers, located in India, to cloud computing service providers located outside India.

(iv) Clarification about refund regularization — Circular no.233/27/2024-GST dated 11th September, 2024.
By the above circular, clarifications are given regarding the regularization of refund of IGST availed in contravention of rule 96(10) of CGST Rules, 2017, in cases where the exporters imported certain inputs without payment of integrated taxes and compensation cess.

C. ADVISORY

  1.  Advisory dated 26th July, 2024 is issued regarding GSTR-1A.
  2.  The GSTN has issued an advisory dated 2nd August, 2024 giving information about changes in GSTR-8.
  3.  One more advisory dated 2nd August, 2024 is issued about biometric-based Aadhar authentication applicable to J&K and West Bengal. Further, such advisory is issued dated 24th August, 2024 in relation to Dadra, Nagar Haveli & Diu, and Chandigarh. By further advisory dated 6th September, 2024, a similar position is made applicable to Bihar, Delhi, Karnataka, and Punjab.
  4. There is information dated 23rd August, 2024 about the Introduction of the RCM liability/ITC statement.
  5.  An advisory dated 23rd August, 2024 has been issued about furnishing bank details before filing GSTR-1/IFF.
  6.  An advisory dated 3rd September, 2024 is issued about reporting interstate supplies to unregistered dealers in GSTR-1/GSTR-5.

D. INSTRUCTIONS

The CBIC has issued instruction No.2/2024-GST dated 12th August, 2024 by which guidelines are given for a second special all-India drive against fake registrations.

Further, CBIC has also issued instruction No.3/2024-GST dated 14th August, 2024 by which para 2(g) of Instruction no.1/2024-GST dated 30th March, 2024, which is regarding procedure in the investigation, is made applicable in relation to the audit also.

E. ADVANCE RULINGS

29. Exemption vis-a-vis functions under Article 243W
M/s. Navya Nuchu (AR Order No.A. R. Com/12/2023 dt. 9th February, 2024 (Telangana)

The applicant has entered into agreement with the Scheduled Castes Development Department, to rent its property.

Scheduled Castes Development Department provides hostel facilities to Students of Schedule Caste weaker sections and backward classes and renting of property from applicants, which was for creating a hostel facility. The argument of the applicant was that they are providing pure services by way of renting activity which is in relation to functions entrusted to a Municipality / Panchayat under Article 243W/243G of the Constitution of India and the same is covered under entry number 3 of Notification No. 12/2017, dt. 28th June, 2017 and hence exempt under GST Act, 2017. Accordingly, the following question was raised.

“1. Whether rent received from the Govt. SWCBH is taxable or not?”

The ld. AAR referred to entry at serial no.3 of notification 12/2017, which reads as follows:

“Pure services (excluding works contract service or other composite supplies involving supply of any goods) provided to the Central Government, State Government or Union territory or local authority or a Governmental authority by way of any activity in relation to any function entrusted to a Panchayat under article 243G of the Constitution or in relation to any function entrusted to a Municipality under article 243W of the Constitution.”

The ld. AAR observed that the contract entered by the applicant to provide their buildings on rent to the Government in an urban area shall be by way of an activity in relation to functions of the Municipality under Article 243W of the Constitution.

The ld. AAR, therefore, referred to Article 243W, and, held that the exemption should be directly related to the functions enumerated under Article 243W of the Constitution of India. The ld. AAR observed that the applicant is providing renting of buildings to GHMC and there is no direct relation between the services provided by the applicant and the functions discharged by the GHMC under Article 243W read with Schedule 12 to the Constitution of India. The Schedule 11 to the Constitution of India contains “Education including primary and secondary schools” at serial no.17. However, Schedule 12, which is in relation to Article 243W, does not contain such a specific entry. Therefore, activity cannot be said to be covered by functions enumerated under Article 243W, observed the ld. AAR.

Accordingly, the ld. AAR held that these services of renting of property do not qualify for exemption under Notification No. 12/2017 and answered the question accordingly, in negative.

30.Classification ‘Teicoplanin’ and ‘Caspofungin’
M/s. Stanex Drugs & Chemicals Pvt. Ltd. (AR Order No.A. R. Com/16/2023 dt. 7th February, 2024 (Telangana)

The applicant is active in developing, Manufacturing & Marketing Domestic and Exporting comprehensive range of pharmaceutical formulations such as small value parental.

The applicant raised a question about the determination of the liability to pay tax on ‘Teicoplanin’ and ‘Caspofungin’.

The ld. AAR observed that the applicant is a manufacturer of parental dosage forms i.e., Drugs and Medicines.

The ld. AAR referred to the item “Drugs or Medicines” as enumerated in Schedule-I to Notification 1/2017 dt. 28th June, 2017 which is as follows:

“S. No. Chapter/Heading/ Sub-heading/ Tariff item

 

 Description of Goods
180. 30 Drugs or medicines including their salts and esters and diagnostic test kits, specified in List 1 appended to this Schedule
181. 30 Formulations manufactured from the bulk drugs specified

in List 2 appended to this Schedule or pharmacopeia]
181A 30 Medicaments (including those used in Ayurvedic, Unani, Siddha, Homeopathic or Bio chemic systems), manufactured exclusively in accordance with the formulae described in the authoritative books specified in the First

Schedule to the Drugs and Cosmetics Act, 1940 (23 of 1940) or Homeopathic Pharmacopoeia of India or the United States of America or the United Kingdom or the German Homeopathic Pharmacopoeia, as the case may be, and sold under the name as specified in such books or

pharmacopoeia]”

The ld. AAR observed that the commodity name is enumerated in the lists appended to the above schedule and the applicant’s commodities are enumerated in said list as follows:

“Sl. No. in List – 1 to Schedule-I Item
103 Capsofungin acetate
216 Teicoplanin”

 

Accordingly, the ld. AAR held that the above products are taxable at the rate of 2.5% CGST & 2.5% of SGST.

31. AIIMS — Exemption as “Governmental Authority”
M/s. All India Institute of Medical Sciences (AR Order No.A. R. Com/21/2023 dt. 8th February, 2024 (Telangana)

All India Institute of Medical Sciences (i.e. applicant, also referred to as AIIMS) is located in Bibinagar, a town in the YadadriBhuvanagiri district in the State of Telangana.

AIIMS is committed to offering top-tier medical education and training programs with an aim to produce skilled healthcare professionals who can meet the evolving healthcare needs of the nation.

The applicant has entered into contracts with several entities for getting inward services, like for the provision of house-keeping services and manpower supply services at AIIMS Bibinagar, for the provision of security services at college, hospital, and hostel facilities, and for Chartered Accountant services etc.

The above service providers charge 18% GST to applicants and it is currently paying said GST at 18% to service providers. However, applicants have to reverse the entire Input Tax Credit (ITC) availed by them on the above services as it is providing exempt services.

The applicant raised the following question:

“1. Whether All India Institute of Medical Sciences can claim GST Exemption on pure services received from Vendors?”

The contention of the applicant was that it is the Central Government and hence supplies made to it are exempt under entries 3 & 3A of Notification 12/2017. To support the claim that it is the Central Government, it submitted documentary evidence like,

“1. AIIMS, Bibinagar, falls directly under the purview of the Ministry of Health & Family Welfare (MOHFW) and is created by an Act of Parliament Act.

2. That Section 5 of the AIIMS Act 1956 designates them as an “Institute of National Importance”.

3. That they are financed by the Central Government by way of appropriation made by Parliament by Lawon this behalf under Section 15 of the said Act.

4. That their accounts are audited by the comptroller and auditor General of India.”

However, based on the above evidence, the ld. AAR held that the applicant is not a Central Government but a “Governmental Authority” as it is established by the Government by the Act of Parliament. The ld. AAR also observed that the entries at SR. No.3 & 3A of Notification 12/2017 are amended with effect from 1.1.2022 by which reference to Governmental Authority is deleted from the said entries. Therefore, the ld. AAR held that the applicant is not eligible for exemption under these two serial numbers and GST is payable by them.

32. ITC vis-à-vis Immovable Property
M/s. ArthanarisamySenthilMaharaj (AR Appeal No.04/2024 AAAR dt. 21st August, 2024 (TN)

This appeal is against the Advance Ruling No.07/ARA/2024 dated 30th April, 2024 – 2024-VIL-70-AAR passed by AAR on the Application for Advance ruling filed by the Appellant.

The appellant supplies ‘Renting of Immovable Property Service’ falling under Service Accounting Code 997212. The Appellant sought a ruling on the admissibility of Input Tax Credit (ITC) on the ‘Rotary Parking System’ falling under HSN code 8428, installed in its premises, which is rented. The AAR held that ITC is not eligible, being blocked u/s.17(5)(d), as immovable property.

In the appeal, the ground was reiterated that the parking system is in the course of business, as allied services for renting business.

It was argued that ultimately the Car parking facility would bring more revenue to the appellant as a result of more revenue to the GST department.

The argument was also made that the car system is movable and the observations about installation etc., to construe car parking as a system, by ld. AAR is not justified on facts. It was also argued that the parking system is plant and machinery.

Thus, the disallowance, holding the car parking system as immovable property, was objected to.

The ld. AAAR observed that a ‘Rotary Parking System’, as the name suggests, is a system in its own right, much more than an equipment, machinery, or apparatus, as it involves the functionality of various items like machines, equipment, motors, frame assembly, pallets, electrical panels, Hydraulic power packs, Operator boxes to floor/walls/columns and other electrical and electronic support system, a specialized civil foundation with steel structure to withstand the load, etc. and Rotary Parking, takes shape and becomes operational only at the site of the appellant when all the constituent parts are assembled first and installed over the civil foundation and steel framework specifically designed for this purpose. Therefore, the ld. AAAR held that it does not fall within the category of ‘plant and machinery’, and that they are very much part of the immovable property, that is being rented out.

After elaborate discussion, the ld. AAAR opined that within the facts and circumstances of this case, the ‘rotary parking system’, installed and commissioned at the premises of the appellant amounts to the construction of an immovable property, whereby the input tax credit on the purchase of ‘rotary parking system’, by the appellant becomes ineligible for ITC under Section 17(5)(d) of the CGST/TNGST Acts, 2017. Thus, the AR passed by AAR was confirmed.

Cross-Charge vs. Input Service Distributor (ISD)

INTRODUCTION

Notification 16/2024-CT has notified 1st April, 2025 as the date from which the proposed amendments to the provisions relating to ‘input service distributor’ will come into effect. In view of the far-reaching implications of the said amendment, this article decodes the provisions relating to ‘input service distributor’, and the interplay the said concept has with the concept of ‘cross charge’ as propounded in view of the provisions of entry 2 of Schedule I of the CGST Act, 2017.

BACKGROUND OF EARLIER LAWS

Prior to the imposition of GST, a central excise duty was imposed on the manufacture of excisable goods. The central excise law required separate registration for each of the premises from where the manufacturing activity was carried out. While the CENVAT Credit Rules as amended from time to time provided for claim of credit of inputs and capital goods used in the manufacture of final products, there was substantial emphasis laid on receipt of the goods in the registered premises and documentary evidence in the form of tax compliant invoices reflecting the said address of the registered premises.

In the said backdrop, when the said Rules were expanded to also permit the credit of input services used in the manufacture of the final products, a need was felt for implementing the existing procedural framework in a realistic manner. In the case of services, it was very common for the said services to be centrally procured at the corporate office. To enable a free flow of credit to the manufacturing locations, the concept of ‘input service distributor’ was introduced under the erstwhile CENVAT Credit Rules, 2004. The said concept permitted an office of the manufacturer to receive invoices towards the receipt of services (either by the said office or by the respective manufacturing units) and distribute the credit embedded in such invoices to the respective manufacturing units. Based on the said concept and registration, the corporate office of a manufacturer could pay for a customs house agent from the office receive an invoice in this regard, and distribute the credit to the concerned manufacturing unit. Similarly, it could pay for corporate services like statutory audits and distribute the credit proportionately to all manufacturing units (since the definition of input service was wide enough to cover services directly or indirectly used in the manufacture of the final product and included various activities related to business and the law also did not require the receipt of input services at the registered premises, such statutory audit services were eligible for credit at the manufacturing locations). The concept of input service distributor was therefore a blessing under the said regime permitting a free flow of credits from the corporate office to the duty-discharging manufacturing locations.

It may be noted that the definition of ‘input service distributor’ under the CENVAT Credit Rules, 2004 laid emphasis on the office receiving an invoice and laid no emphasis on whether the services were received by the office or the manufacturing location and whether the invoice or the services were received by the office on its’ own account or ‘for or on behalf of’ the manufacturing location. This is evident on a plain reading of the definition of input service distributor as provided under 2(m) of the erstwhile CENVAT Credit Rules, 2004, which is reproduced below for ready reference.

“input service distributor” means an office of the manufacturer or producer of final products or provider of output service, which receives invoices issued under rule 4A of the Service Tax Rules, 1994 towards purchases of input services and issues invoice, bill or, as the case may be, challan for the purposes of distributing the credit of service tax paid on the said services to such manufacturer or producer or provider, [or an outsourced manufacturing unit] as the case may be

— Emphasis supplied

The concept of ‘input service distributor’ under the CENVAT Credit Rules, 2004 applied to service providers as well. However, in view of the facility for centralized registration available under the service tax law, the said concept had limited applicability except in the case of taxpayers who had obtained decentralized registrations.

WELCOME GST

GST was introduced as a comprehensive indirect tax modeled on the principle of destination-based consumption tax. However, in view of the federal structure and the Constitutional mandate, the law required distinct registration in each of the States from which the taxpayer supplied taxable goods or services. This need for distinct state-level registration triggered a fundamental challenge of imbalance in input tax credits and output taxes in cases where the inward procurements are effected in one State and the outward supplies are effected from another State. Perhaps to address the said situation, Entry 2 was inserted in Schedule I to deem the supply of goods or services or both between distinct persons as liable for payment of GST even if the said supplies are made without consideration. Accordingly, an office warehouse, or factory in the State procuring the inward supplies could raise a tax invoice on a branch warehouse, or factory located in another State for effecting the deemed outward supplies to the said branch warehouse, or factory (even though there is no monetary consideration and the supply is between two units of the same legal entity). Such discharge of output tax by the first state would be eligible as input tax credit to the other state resulting in no revenue loss to the taxpayer but at the same time permitting free flow of credits from the input procuring locations to the output supplying locations. In trade parlance, such raising of internal tax invoice is referred to as ‘branch transfer’ in case of deemed supply of goods and ‘cross charge’ in case of deemed supply of services.

Despite having introduced the above deeming fiction to address the issue of imbalance in input tax credits and output taxes, the Legislature, in its wisdom deemed it fit to continue with the provisions of ‘input service distributor’ existing in the erstwhile CENVAT Credit Rules, 2004. The definition was amended mutatis mutandis, permitting the input service distributor to receive a tax invoice and issue an ISD Invoice for distribution of the said credit without any specific emphasis on whether the services were received by the said office or the other unit and whether the invoice or the services were received by the said office on its’ own account or ‘for or on behalf of’ the other unit. The relevant definition of ‘input service distributor’ under section 2(61) at the time of the introduction of GST is reproduced below for ready reference.

“input service distributor” means an office of the supplier of goods or services or both, which receives tax invoices issued under section 31 towards the receipt of input services and issues a prescribed document for the purposes of distributing the credit of central tax, state tax, integrated tax or Union territory tax paid on the said services to a supplier of taxable goods or services or both having the same PAN as that of the said office.

— Emphasis supplied for suitable comparison with the erstwhile definition under CCR, 2004

On a comparison of the above definition with the erstwhile definition under CCR, 2004, it is evident that both definitions are pari materia with no substantial change in the scope of the said provisions.

CONTROVERSIES GALORE!

The co-existence of Schedule I, Entry 2 (‘cross charge provision’), and Section 20 (‘input service distributor’) presented substantial confusion since apparently, both the provisions appeared to address a similar problem of ‘imbalance in input tax credit and output taxes’ in different ways. In view of the proviso to Rule 28(1) permitting flexibility in the valuation of the cross charge in case the recipient is eligible for full input tax credit and FAQ issued by the CBIC clarifying that registration as an input service distributor is optional, there was a view that a taxpayer may implement either of the two provisions to address the problem, whereas certain advance rulings canvassed a view that both the provisions operate in different set of situations and as such, both the provisions need independent implementation.

The matter was taken up by the GST Council in its’ 50th Meeting held in July 2023, wherein it was clarified that the provisions of ‘input service distributor’ are indeed optional. Further clarifications were also provided relaxing the rigors of the applicability of ‘cross charge’ provisions. At the same time, the GST Council suggested that the provisions of ‘input service distributor’ be made mandatory prospectively from a date to be notified in the future. Accordingly, suitable changes have been proposed in the CGST Act, 2017 and the CGST Rules, 2017, and the said changes are proposed to be made effective from 1st April, 2025.

KEY AMENDMENT

As stated above, there are amendments to various sections and rules. However, the fundamental amendment pertains to the definition of ‘input service distributor’ and the amended definition u/s 2(61) needs detailed scrutiny to understand the impact of the change being proposed in the correct perspective. The amended definition (as proposed to be effective from 1st April, 2025) is reproduced below for ready reference:

“Input Service Distributor” means an office of the supplier of goods or services or both that receives tax invoices towards the receipt of input services, including invoices in respect of services liable to tax under sub-section (3) or sub-section (4) of section 9, for or on behalf of distinct persons referred to in section 25, and liable to distribute the input tax credit in respect of such invoices in the manner provided in section 20

— Emphasis supplied for suitable comparison with the erstwhile definition under CCR, 2004, and the pre-amended definition under section 2(61) of the CGST Act, 2017

On a perusal of the above-amended definition, it is evident that there are two substantial amendments being carried out as compared to the erstwhile definition under CCR, 2004 and the pre-amended definition under section 2(61) of the CGST Act, 2017:

1. The phrase ‘for or on behalf of distinct persons’ is being introduced for the first time in the definition of ‘input service distributor’

2. The ‘input service distributor’ is made ‘liable’ to distribute the input tax credit, thus making the provisions of the input service distributor mandatory.

The judicial interpretation of the phrase ‘on behalf of’ is fairly settled. The said phrase connotes the existence of an agency relationship between the two parties (State of Mysore vs. Gangamma AIR 1965 Mysore 235). In the context of property, it was held that the holder of the property was only a representative of the real owner (Kripashankar vs. Commissioner of Wealth Tax AIR 1966 Patna 371). Even in the context of intermediary services under GST, the concept of agency vs. principal and the implications of the phrase ‘on behalf of’ has been exhaustively explained.

Extending the said interpretation of the phrase to the current context, it can be understood that the provisions of ‘input service distributor’ are triggered in a situation where an ISD office receives tax invoices towards the receipt of input services for or on behalf of distinct persons. As compared to the erstwhile definition under the CCR, 2004, and the pre-amended definition under the GST Law, clearly the introduction of this phrase reduces the scope of coverage under ISD post amendment. Effective from 1st April, 2025, it would therefore be important to distinguish between a situation where an input service is received by an office on behalf of a distinct person and an input service that is received by an office on its’ own account.

A few examples may illustrate the implications of this interpretation:

1. The head office in Maharashtra appoints and pays for security services procured at the factory located in Gujarat. Since the security services are received by the factory located in Gujarat, the tax invoice for the said service is received by the head office ‘for or on behalf of’ the factory in Gujarat, thus triggering the mandate of registration as an input service distribution and the consequent distribution of credit to Gujarat. Incidentally, a similar example was explained in a draft circular recommended by the Law Committee and placed before the GST Council in its’ 35th Meeting. However, the said Circular never saw the light of the day.

2. The head office in Maharashtra appoints and pays for goods transportation services procured at the factory located in Gujarat. It also pays the GST under reverse charge mechanism on such GTA services. Since the GTA services are received by the factory located in Gujarat, the tax invoice for the said service is received by the head office ‘for or on behalf of’ the factory in Gujarat, thus triggering the mandate of registration as an input service distribution and the consequent distribution of credit to Gujarat.

3. The head office in Maharashtra enters into a contract with an insurance company for insurance of assets located across the country. There are assets located in Maharashtra and also in the state of Gujarat. To the extent of assets located at the Gujarat factory, the insurance service of coverage of risk is received by the factory located in Gujarat, and the tax invoice for the said service is received by the head office ‘for or on behalf of’ the factory in Gujarat, thus triggering the mandate of registration as an input service distribution and the consequent distribution of credit to Gujarat.

While the above specific examples may look simplistic, where would one draw the line to say that the instance is that of service received ‘on behalf of’ a distinct person or a service received on ‘own account’. Let us understand this through a couple of more examples:

1. The head office in Maharashtra imports certain raw materials at the Mumbai port and transports the said goods to a warehouse in Bhiwandi. It appoints and pays for goods transportation services for the movement from Mumbai port to Bhiwandi. After some time, the said raw materials are further supplied to the factory located in Gujarat at a value prescribed under rule 28. It is obvious that in this scenario, the transportation and warehousing services are not received by the factory located in Gujarat, but are received by the head office on its’ own account. In fact, the cost of such transportation and warehousing services would become components of the cost calculation for arriving at a valuation under rule 28. Therefore, such services would not be a subject matter of input service distributor (but indirectly become a part of Schedule I, Entry 2 by way of the value of goods being ‘branch transferred’)

2. The head office in Maharashtra houses a centralized Human Relations Team. The said Team is responsible for addressing comprehensively all the HR requirements of the company including the employees at the factory located in Gujarat. If the HR Team places an advertisement in the newspaper inviting applications from prospective candidates, can it be said that the said advertisement service is received for and on behalf of the Gujarat factory? The draft circular referred to earlier suggests that through the HR Team, the head office internally generates a support service for the Gujarat factory, albeit through another circular, a relaxation in valuation has been provided to the extent of salary costs of the HR Team. If the Head Office is providing a support service to the Gujarat factory, is the advertisement service not received and consumed by the Head Office on its’ own account for further rendition of the ‘cross-charged support service’?

Based on the above examples, one may conclude that the provisions of input service distributors will get triggered only when the tax invoices for the services are received for or on behalf of distinct persons. Receipt would mean actual receipt of service and not an imaginary receipt in the form of perceived benefit. In cases where a service is received and consumed by the HO, the provisions of the input service distributor will not get triggered. It may also be possible that the service is received for self-consumption by the head office and the consumption of the said service may result in the generation of another supply of goods or service for the branch. The two examples mentioned above drive home this interpretation.

There may also be situations where the service may be self-consumed by the head office with no further supply of goods or services to the branch. For example, a research service procured by the head office may not immediately result in a further supply of support services to the branches. At the same time, in many cases, it cannot be said that the research is undertaken for or on behalf of the branches. At some future point in time, an indirect benefit of the service may be derived by the branch, but merely a derivation of some indirect benefit cannot result in the presumption that the head office procured the service on behalf of the branch.

NEXT STEPS TOWARDS IMPLEMENTATION

– Registration

With ISD becoming mandatory w.e.f. 01.04.2025, the first step towards preparing for ISD would be identifying the number of such offices that qualify as ISD. All offices that undertake centralized procurement of services / procurement of services consumed by more than one registration will have to apply for registration. Wherever possible, organizations will have to move towards decentralized procurement of services, if current procurement is centralized. Similarly, if more than one offices are engaged in centralized procurement, wherever possible, organizations should move towards a single procurement office. Once such offices are identified, the next step would be to apply for registration as an ISD.

– Vendor Communication

Though ISD is mandatory from 01.04.2025, taxpayers will have to apply beforehand for registration and communicate the ISD GSTIN to all the vendors/suppliers for existing as well as new contracts.

In case the vendor communication is not done, the vendors may continue to raise invoices under the regular GSTIN which may delay the taxpayer’s ITC claim. This is because the ITC may not be available for claim in regular GSTIN and the taxpayer will not be able to distribute the ITC under ISD in view of section 16 (2) (aa) of the CGST Act, 2017. It is therefore imperative that all the suppliers for services procured centrally are intimated to the ISD GSTIN in advance.

Vendor communication needs to be done, irrespective of whether the taxpayer is entitled to claim ITC or not. This is because the ultimate objective of making ISD mandatory is to ensure that the taxes flow to the states where the consumption takes place. Therefore, the taxpayer cannot exclude considering supplies not eligible for ITC from the purview of the ISD mechanism.

– Invoicing and Accounting

Taxpayers will also have to adapt their systems to separate accounts & identify the invoices received under ISD registration. More importantly, while accounting for such supplier invoices, care should be taken to ensure that the invoices are accounted / plotted against the ISD GSTIN and not the regular GSTIN to avoid any mismatches. If any invoice pertains to specific GSTINs, a mechanism to identify such transactions should be introduced to ensure that the ITC is distributed only to such GSTINs and not all GSTINs, as it would otherwise amount to erroneous distribution of ITC and may result in recovery proceedings at the recipient GSTIN end.

Similarly, systems will also have to be geared up to account for the ISD invoices issued to the regular GSTIN. This would be crucial in case ISD and regular GSTIN are of the same state. In such cases, the systems may not be geared up for accepting all three taxes, i.e., IGST, CGST & SGST against the same invoice/ document.

– Filing of GSTR6 based on GSTR6A

The ISD compliances lay between the accounting of the vendor invoices and the distribution of the ITC to the regular GSTIN. On the 12th of every month, based on the disclosure by the supplier, invoices will be communicated to the ISD in Form GSTR-6A.

A matching of transactions reflected in GSTR-6A (irrespective of whether ITC is eligible or not) with the corresponding invoices received by the ISD shall be undertaken and after adding, correcting, or deleting the auto-populated details, the ITC available for distribution shall be determined. The ITC so available for distribution shall then be distributed in the following manner:

a) If any ITC pertains only to a particular GSTIN, such ITC shall be distributed only to that GSTIN.

b) Similarly, any ITC that pertains to more than one GSTINs shall be distributed to such GSTINs in the ratio of turnover during the relevant period.

Separate ISD invoices are to be prepared for distribution of eligible & ineligible ITC.

– Compliances & recovery at the recipient’s end

The various compliances that apply to a claim of ITC, such as receipt of goods / services, payment of tax by the supplier, payment of consideration to the supplier, etc., in case of ISD shall apply to the receiving GSTIN. Therefore, the taxpayers will have to specifically keep track of payment to suppliers to ensure compliance u/r 37 & classification of the invoice for Rule 42 purposes and the said compliance will have to be done by the GSTIN receiving the ITC.

If the ISD receives any credit note for an invoice that has already been considered in the earlier period distribution, the ISD will have to ensure that the reduction in the distribution of the ITC on account of the credit note follows the same ratio applied for distribution of the ITC on the invoice.

Lastly, if any excess distribution by ISD is determined, the recovery shall be done at the recipient end and not at the ISD end. Therefore, an officer of the recipient GSTIN can very well demand to verify the compliances of ISD and may result in potentially multiple and in some cases, conflicting proceedings.

Disputes surrounding the applicability of ISD vs. cross-charge

The examples explained above suggest that the line of divide between ISD and cross charge is very thin. In the absence of authoritative objective guidelines in this regard, it is likely that there can be disputes on the applicability of the said provisions.

In case the taxpayer considers a particular transaction as a subject matter of ISD and the same is ultimately held to be not a subject matter of distribution but that of cross charge, there could be a risk of denial of input tax credit at the recipient’s end on account of excess distribution of credit by the input service distributor. Independently, there could be an action against the head office for undervaluation of cross charge (the action could survive only if the recipient is not eligible for full input tax credit)

In a reverse scenario where the taxpayer has considered a particular transaction as a subject matter of the cross charge, but the same is ultimately held to be a subject matter of input service distribution, the credit claimed by the head office can be denied on the grounds of non-receipt of input service (since the allegation would be that the service is received on behalf of the branches). Further, at the branch level, there could be a risk of denial of credit embedded in the cross-charge invoice by the head office to the branch again on the ground of the non-existence of a ‘cross-chargeable service’

Conclusion:

While both the concepts of ‘cross charge’ and ‘input service distributor’ attempt to address the same problem of non-alignment of input tax credits and output taxes, in terms of implementation, both of them differ significantly. With the concept of ‘input service distributor’ becoming mandatory, it will be important for taxpayers to implement the said concept with full precaution. It may also be appropriate for the Government to provide a detailed guideline on the extent of coverage of the provisions of input service distributors.

Recent Developments in GST

A. NOTIFICATIONS

i) Notification No.10/2024-Central Tax dated 29th May, 2024 & Notification No.11/2024-Central Tax dated 30th May, 2024

The above notifications seek to amend the Notification no. 02/2017-CT dated 19th June, 2017, which is regarding Territorial Jurisdiction of Principal Commissioner / Commissioner of Central Tax, etc. There are substitutions for changes in jurisdiction.

ii) Notification No.12/2024-Central Tax dated 10th July, 2024

The above notification seeks to make amendments in CGST Rules, 2017. Amongst other, there are amendments in Rules relating to returns, ISD, refund and appeal to Tribunal, etc.

iii) Notification No.13/2024-Central Tax dated 10th July, 2024

The above notification seeks to rescind Notification no. 27/2022-Central Tax dated 26th December, 2022, which was regarding applicability of Rule 8(4A) of CGST Rules.

iv) Notification No.14/2024-Central Tax dated 10th July, 2024

The above notification seeks to exempt the registered person, whose aggregate turnover in FY 2023–24 is upto ₹2 crores, from filing annual return for the said financial year.

v) Notification No.15/2024-Central Tax dated 10th July, 2024

The above notification seeks to amend Notification No. 52/2018-Central Tax, dated 20th September, 2018, whereby the amount to be collected by electronic commerce operator is reduced from half per cent to 0.25 per cent, effective from 10th July, 2024.

B. NOTIFICATIONS RELATING TO RATE OF TAX

i) Notification No.2/2024-Central Tax (Rate) dated 12th July, 2024

The above notification seeks to amend Notification No 01/2017- Central Tax (Rate) dated 28th June, 2017 for changes in rates of taxes on some commodities like cartons, boxes, milk cans made of iron, steel, aluminium and solar cookers, etc.

ii) Notification No.3/2024-Central Tax (Rate) dated 12th July, 2024

The above notification seeks to amend Notification No. 02/2017- Central Tax (Rate) dated 28th June, 2017, which is regarding tax in relation to “pre-packaged and labelled” goods. The proviso is added in relation to agricultural farm produce.

iii) Notification No.4/2024-Central Tax (Rate) dated 12th July, 2024

The above notification seeks to amend Notification No 12/2017- Central Tax (Rate) dated 28th June, 2017, which is regarding exempt services. Certain more services are added as well as other changes are made in the said notification.

C. CIRCULARS

Following circulars are issued by CBIC.

(i) Clarification about administrative changes – Circular no.223/17/2024-GST dated 10th July, 2024.

By above circular, administrative changes are made in relation to functions of proper officers under various sections of CGST Act like relating to Registration, etc.

(ii) Guidelines about recovery – Circular no.224/18/2024-GST dated 11th July, 2024.

By above circular, guidelines are given about recovery of outstanding dues during the period from disposal of first appeal till Appellate Tribunal comes into operation.

(iii) Clarification about Corporate Guarantee – Circular no.225/19/2024-GST dated 11th July, 2024.

By above circular, clarifications are given about issues relating to taxability and valuation of supply of services of providing corporate guarantee between related persons.

(iv) Clarification about additional refund – Circular no.226/20/2024-GST dated 11th July, 2024.

By above circular, mechanism for refund of additional IGST paid on account of upward revision in price of goods, subsequent to Export, is clarified.

(v) Clarification – Refund to CSD – Circular no.227/21/2024-GST dated 11th July, 2024.

By above circular, clarifications are given about processing of refund applications by Canteen Stores Department.

(vi) Clarification – GST on certain Services – Circular no.228/22/2024-GST dated 15th July, 2024.

By above circular, clarifications are given regarding applicability of GST on certain services like Indian Railway, RERA, BHIM-UPI transactions, General Life Insurance Schemes, Retrocession services and certain accommodation services, etc.

(vii) Clarification about Classification – Circular no.229/23/2024-GST dated 15th July, 2024.

By above circular, clarifications are given regarding GST rates and classification of goods based on recommendation of GST council in 53rd Meeting.

D. ADVANCE RULINGS

24. Health Care Services – Scope

M/s. Spandana Pharma (AR Order No.KAR ADRG-05/2024 dt. 29th January, 2024 (KAR)

The applicant is a Proprietorship Concern and engaged in the activity of providing health care services. The applicant also runs a hospital in the name of Spandana Pharma. Applicant sought to know ruling on following questions:

“i. Whether the supply of medicines, drugs and consumables used in the course of providing health care services to in-patients during the course of diagnosis and treatment during the patients admission in hospital would be considered as “Composite Supply” qualifying for exemption under the category of “health care services” as per Services Exempt Notification No.12/2017-Central Tax (Rate) dated: 28-06-2017 read with Section 8(a) of the CGST Act, 2017 / KGST Act, 2017?

ii. Whether the supply of food to in-patients would be considered as “Composite Supply” of health care services under CGST Act, 2017 & KGST Act, 2017 and consequently, can exemption under Services Exempt Notification No. 12/2017-Central Tax (Rate) dated: 28-06- 2017 read with Section 8(a) of GST be claimed?

iii. Retention Money: Whether GST is applicable on money retained by the applicant?

iv. Whether GST is exempt on Fees collected from nurses and psychologists for imparting practical training?”

Applicant explained that they are engaged in providing treatment to in-patients and outpatients suffering from psychic disorder, substance use disorder (addiction of drugs), neurology and other specialties.

The steps taken for curing the diseases were also explained.

The applicant referred to entry at sl.no.74 of Services Exemption Notification No.12/2017 Central Tax (Rate) dated 28th June, 2017, which reads as under:

“Sl.

No.

 Chapter Description of Services Rate Condition
74 Heading 9993 Services by way of:

(a) healthcare services by a clinical establishment, an authorised medical practitioner or paramedics:

(b) services provided by way of transportation of a patient in an ambulance, other

than those specified

in (a) above.

 NIL NIL

The applicant also referred to the term “healthcare services” which is defined in Para 2 (zg) of Services Exemption Notification No. 12/2017 Central Tax (Rate) dated 28th June, 2017.

The applicant submitted that it fulfils condition of being a clinical establishment as per definition of said term in para 2(zg) of Notification no.12/2017 dt. 28th June, 2017. The different SAC applicable to its services were stated as under:

SCS 9993 – Human Health and Social Care Services

SCS 99931 – Human Health Services

SCS 999311 – Inpatient services

The applicant submitted on its nature of services as under:

“The primary purpose of the hospital is to provide treatment to the patients approaching them. The basic Intention of the patients visiting the hospital is to get treatment for their ailment mainly mental disorder. Depending upon the severity of the illness the patient may require immediate medical attention, continuous monitoring etc. Therefore, according to their health condition they will be admitted in hospital as inpatient. The patients admitted to a hospital are treated with proper diagnosis of the disease / illness and treatment including appropriate medicines, surgical procedures if necessary, consumables required along with proper diet is administered to them in the most efficient manner so that they can regain their health within the shortest possible time and resume their activities. Therefore, the medicines, consumables and foods supplied in the course of providing treatment to the patients admitted in the hospital is an integral part of the health care service extended to the patients. Hence the room, medicines, consumables and food supplied in the course of providing treatment to the patients admitted in the hospital is undoubtedly naturally bundled in the ordinary course of business and the principal supply is health care service which is the predominant element of the composite supply and the other supplies such as room, medicines, consumables and food are incidental or ancillary to the predominant supply.”

The applicant also placed reliance on various Advance Rulings on similar facts like, in case of Malankar Orthodox Syrian Church Medical Mission Hospital reported in 2021 (53) G.S.T.L. 434 (A.A.R.-GST-Ker) and others.

Regarding question (B), applicant submitted that entry 74 of Services Exemption Notification No. 12/2017 Central Tax (Rate) dated 28th June, 2017 exempts healthcare service from payment of GST and healthcare services will be the predominant element of his composite supply, whereas medicines, surgical items, implants, stents and other consumables used in the course of providing such health care services to the inpatients are ancillary to it and does not itself become principal supply. In this respect, reliance was placed on definition of “composite supply” given in section 2(30) and “principal supply” given in section 2(90) of CGST Act. It was stressed that the tax liability on a composite supply shall be the rate of tax applicable on principal supply and since in its case, the principal supply of health care services is exempt from payment of tax, the supplies of other items ancillary to the principal supply of health care services are also exempt from payment of tax.

Accordingly, it was also submitted that supply of food to in-patients admitted to the hospital for medical treatment is a component of the composite supply and exempt along with the principal supply of healthcare services.

Regarding question (C), the applicant submitted that the term “Retention Money / charges” means those charges that are deducted by the hospitals while making payment to consultant doctors & technicians. It was explained that applicant invites consultant doctors with specialisation in mental health for diagnosing mental illness of patients and to suggest medicine, tests, rehabilitation, etc.

Based on para (5) in Circular No. 32/06/2018-GST dated 12th February, 2018, issued by Government of India, it was stated that the entire amount charged from the patient for payment to doctors and technicians towards health care services provided by the hospital is exempt from tax and hence, retention money is also exempt.

Regarding question (D), the applicant submitted that they provide practical training to nursing students and psychologists who are on the verge of completing course in recognised educational institutions. Nursing students and psychologists study theory in educational institutions, and applicant provides practical training to gain knowledge.

It was submitted that fees collected towards such training should be considered as exempt under entry no.74 of Notification no.12/2017-Central Tax (R) dated 28th June, 2017.

After considering above elaborate submission, the ld. AAR observed that the primary purpose of the hospital is to provide treatment to the patients approaching it, and the intention of the patients visiting the hospital is to get treatment for their ailment. Depending upon the severity of the illness and according to the health condition of the patient, they will be admitted to hospital as in-patient, observed the ld. AAR. The ld. AAR observed that different services are provided to the in-patients so that they can regain their health within the shortest possible time and resume their activities and therefore, the medicines, consumables and foods supplied in the course of providing treatment to the patients admitted in the hospital is an integral part of the health care service extended to the patients. All above are composite supply in relation to health care services and hence fall in exempted category, held the ld. AAR.

Regarding retention money, ld. AAR, following para (5) of Circular No. 32/06/2018-GST dated: 12th February, 2018, observed that entire amount charged by the hospital from the patients including the retention money and the fee / payments made to the doctors, etc., is towards the health care services provided by the hospital to the patients and accordingly exempt.

Regarding question (D), the ld. AAR observed that as per the meaning of “health care service” in definition of said term, it should be a service by way of diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy. The ld. AAR held that the applicant is providing practical training to nursing students and psychologists, and hence, it is not covered under health care services. The ld. AAR determined the questions as under:

“i. The supply of medicines, drugs and consumables used in the course of providing health care services to in-patients during the course of diagnosis and treatment would be considered as ‘Composite Supply’ of health care services qualifying for exemption as per entry No. 74(a) of Notification No. 12/2017-Central Tax (Rate) dated: 28.06.2017 subjected to the condition mentioned therein.

ii. The supply of food to in-patients would be considered as ‘Composite Supply’ of health care services qualifying for exemption as per entry No. 74(a) of Notification No. 12/2017-Central Tax (Rate) dated: 28.06.2017 subjected to the condition mentioned therein.

iii. GST is not applicable on money retained by the applicant.

iv. GST is not exempted on the fees collected from nurses and psychologists for imparting practical training.”

25. Work without Civil Work vis-à-vis Works Contract

M/s. IDMC Limited (AR Order No. GUJ/ GAAAR/APPEAL/2023/08 (In App.No. Advance Ruling/SGST&CGST/2022/AR/02) dt. 7th December, 2023 (Guj)

The appellant has sought Advance Ruling on the following
questions:

“1. Whether contract involving supply of equipment/ machinery & erection, installation & commissioning services without civil work thereof would be contemplated as composite supply of cattle feed plant under GST regime. If the supplies would qualify as composite supply, what would be the classification of this bundle and applicable tax rate thereon in accordance with Notification No. 01/2017 – CT(Rate) dated June 28, 2017 (as amended).

2. Whether contract involving supply of equipment/ machinery & erection, installation & commissioning services with civil work thereof would be contemplated as works contract service or not. If the supplies would qualify as composite supply of works contract, what would be the classification and applicable tax rate thereon in accordance with Notification No.11/2017 – CT(Rate) dated June, 28, 2017 (as amended).?”

The ld. AAR decided the application vide Ruling No. GUJ/ GAAR/R/ 2022/14 dated 14th March, 2022 – 2022-VIL-92- AAR. This appeal is against above AR order.

The main contention of appellant was that they supply cattle feed plant, which includes equipment and machinery as well as erection and installation services thereof with or without civil work. The intention of the agreement in the present case is the supply and installation of cattle feed plant, and this arrangement does not include any civil work / services. It was further case of appellant that it qualifies to be composite supply; but not “works contract service”; since, as per the definition of works contract, erection, fitting out, etc. should be carried out for an immovable property. Appellant cited AR in their own case having similar facts, bearing no. GUJ/GAAR/ REFERENCE /2017-18/1, where it is held that contract without civil work would not be contemplated as works contract. Other rulings also relied upon.

It was contended that the Contract was thus for supply of cattle feed plant along with services and would qualify as composite supply and would be classifiable under the heading 8436 attracting GST @12 per cent. The ld. AAR had ruled as under:

“Supply of a functional Cattle Feed Plant, inclusive of its Erection, Installation and Commissioning and related works involved for both the question 1 & 2, is Works Contract Service Supply, falling at SAC 998732 attracting GST at 18%.”

The appellant reiterated its contentions and also cited further authorities before the ld. AAAR.

The ld. AAAR observed that due to Clause 6 of Schedule II of CGST Act 2017, Works Contract is a composite supply and same is treated as supply of services.

The ld. AAAR also referred to term “works contract” defined in Section 2(119) of CGST Act,2017 as below:

“‘works contract’ means a contract for building, construction, fabrication, completion, erection installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.”

The ld. AAAR further observed that the term “immovable property” is not defined under GST law, but Section 3(26) of the General Clauses Act says “immovable property” shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.

The ld. AAAR referred to photographs submitted by appellant and reproduced the same in the appeal order.

The ld. AAAR observed that as per appellant, they have following responsibilities with respect to plant execution:

“(i) Supply of cattle feed equipment such as pellet mill, hammer mill, etc.

(ii) Supply of other ancillary equipment / goods such as MS Structural, MS Chequered plates, Conveyors for transporting raw material in the plant, Electrical switch boards and cables etc.

(iii) Services relating to commission, installation and erection of equipment.

(iv) Undertaking trial runs on the machinery installed and testing of output received.”

The ld. AAAR further observed that, from the photographs and details, of supplies made, the various equipments assembled by the appellant at the customer’s premises are either fitted with foundation / structures or fitted on foundation / structures, and the said cattle feed plant set up at customer’s premises cannot be shifted from one place to another without dismantling of all the equipments, machine parts and accessories and electrical systems. Therefore, the ld. AAAR observed that the cattle feed plant supplied involves supply of goods as well as services like installation, erection and commissioning of the plant, and it fulfils the criteria of an “immovable property” as it is attached to the earth or permanently fastened to anything attached to the earth.

The ld. AAAR referred to various case laws on subject and also peculiar facts noted by ld. AAR in its order. Considering the above, the ld. AAAR dismissed the appeal confirming order of ld. AAR.

26. Classification – “Tree Pruners”

M/s. Global Marketing (AR Order No. KAR ADRG-02/2024 dt. 29th January, 2024 (Kar)

The applicant is a Partnership firm and engaged in the business activity of buying and selling of product called “Tree Pruners”. The product essentially consists of a pole which can be extendable in length and fitted with a knife, which is used in agricultural activities such as harvesting the crops of areca, pepper and coconut and also in spraying pesticide.

The appellant has sought advance ruling in respect of the
following questions:

“a) Whether the tree pruners covered by HSN Code 82016000 relates to Agricultural implements manually operated or animal driven i.e. hand tools, such as spades, shovels, mattocks, picks, hoes, forks and rakes, axes, bill hooks and similar hewing tools; secateurs and ‘pruners of any kind’; scythes, sickles, hay knives, hedge shears, timber wedges and other tools of a kind used in agriculture, horticulture or forestry other than Ghamella.

b) Whether the supply of Agriculture Hand Tools i.e., Tree Pruners to farmer is exempt from the CGST/ SGST/IGST Act.”

The applicant explained that the said product is made, predominantly, out of raw material “aluminium”, and hence, the probable classifications would be either based on the usage or based on the raw material, i.e., articles of aluminium. The contention of the applicant was that since it has a knife, it cannot be used for any general purpose, but it can be used by farmers for harvesting the crops of areca, pepper and coconut and used in spraying pesticide.

The other aspects like, it is seasonal and entitled for a subsidy from the Horticulture Department, was also brought to the notice of ld. AAR.

It was submitted that “Tree Pruners” are agricultural implements and hence in common parlance, it can be regarded as a tool, which is used in agriculture, specifically in relation to harvesting coconut, areca and pepper. Hence, the product merits classification as an “agricultural implements / tool used in agriculture” under Tariff Heading 8201 9000 and accordingly exempt.

The ld. AAR referred to Chapter 82 of the Customs Tariff and further Tariff Heading 8201 60 00 which covers “Hedge shears, two-handed pruning shears and similar two-handed shears Products.”

The ld. AAR observed that the product in question, i.e., “Tree Pruner” is a manually operated agricultural implement and hence qualified to be a tool of a kind used in agriculture. The ld. AAR further observed that “pruners of any kind” finds specific mention in the description of entry at Sl. no. 137 and, therefore, the aforesaid exemption is squarely applicable to the product under consideration.

Accordingly, AAR passed order, holding that the supply of Tree Pruners is exempted vide Entry No. 137 of Notification No. 2/2017 – Central Tax (Rate) dated 28th June, 2017.

27. Renting of Residential dwelling – Scope

Ms. Deeksha Sanjay, proprietrix, M/s. Deeksha Sanjay (AR Order No. KAR ADRG-34/2023 dt. 16th November, 2023 (Kar)

The applicant is a proprietary concern, registered under the GST Act, engaged in the business of renting of residential dwelling, situated at #14, 2nd Cross, Thimmappa Reddy Layout, Bengaluru-560076. Being the owner of the said property, applicant pays property tax to the BBMP, and the said building is suitable for residential purposes, and it is sanctioned for usage as residential building.

The applicant has sought advance ruling in respect of the following questions:

“a. Whether renting of residential dwelling to the students and working women for residential purpose along with amenities and facilities such as food, furniture, appliance, cleaning, security, pest control etc., on monthly rental basis, is exempt under entry No. 12 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 or not?

b. If applicant transaction is not exempt, then what is the GST rate?

c. If applicant transaction is taxable, whether applicant can claim ITC on input used for providing taxable service?”

Amongst others, applicant provides services like cot with mattress, table with chair and cupboard with locking facility, one light and one fan per room and attached bathroom, breakfast, lunch, dinner and evening tea / snacks, laundry, power backup, house-keeping, security and RO drinking water.

The applicant explained that it provides residential dwelling to the students and working women on monthly rental basis; the services involve basic residential facilities required for staying and study which include well- maintained furnished residence, light, water, etc.,

Applicant provides the following three types of renting services on monthly rental basis according to the option of the students / women:

“a) Single Occupancy: A unit in residential dwelling which contains single bed in a room for single person, having facilities of electricity, food, furnishing, fan, lighting etc.,

b) Double Occupancy: A unit in residential dwelling that contains two beds in a room for two persons, having facilities of electricity, food, furnishing, fan, lighting etc., dual occupancy is a great way to save money, normally this option is chosen by one or more friends/relatives who are familiar with each in study. If empty units available then from dual occupancy to occupancy can be opted by residents.

c) Triple Occupancy: A unit in residential dwelling that contains three beds in a room for three persons, having facilities of electricity, food, furnishing, fan, lightings etc., Student who generally wish to study in a group will choose this option.”

Citing relevant provisions of law, the submission of applicant was that the services by way of renting of residential dwelling for use as residence are covered under SAC 9963 or 9972 and exempted by entry 12 of Notification 12/2017-Central Tax (Rate) dated 28th June, 2017 read with Notification 04/2022-Central Tax (Rate) dated 13th July, 2022. It was tried to impress that contract for renting of residential dwelling along with facilities is a composite supply of renting service, the Principal Supply is renting of residential dwelling, other facilities are incidental to the renting of dwelling unit, and hence exempt as above. Meanings of “residential”, “dwelling”, etc., were cited.

In this regards, the ld. AAR referred to relevant entries of Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017 and reproduced as under:

“Sl.

No.

 Chapter, Section, Heading, Group or Service Code (Tariff) Description of Services Rate (per cent) Condition
(1) (2) (3) (4) (5)
12 Heading 9963

or Heading 9972

 Services by way of renting of residential dwelling for use as residence [except where the residential dwelling is rented to a registered person]. NIL NIL
[Explanation. – For the purpose of exemption under this entry, this entry shall cover services by way of renting of residential dwelling to a registered person where:
(i) the registered person is proprietor of a proprietorship concern

and rents the residential dwelling in his personal capacity for use as

his own residence; and Heading 9963 or Heading 9972
(ii) such renting is
(1) (2) (3) (4) (5)
on his own account and not that of the

proprietorship concern.]
14 Heading 9963 Services by a hotel, inn, guest house, club or campsite, by whatever name called, for residential or lodging purposes, having declared tariff of a unit of accommodation below one thousand rupees per day or equivalent.” NIL NIL

The ld. AAR also observed that entry at Sl. No. 14 is omitted vide Notification No.4/2022 dated 13th July, 2022 and thus in effect, only services by way of renting of residential dwelling for use as residence are exempted from GST. Services by a hotel, an inn, a guest house, a club or a campsite by whatever name called, for residential or lodging purposes, even when below ₹1,000 are liable to GST w.e.f. 18th July, 2022.

Referring to terms about rent, unit and offer of accommodation in service agreement, the ld. AAR observed as under:

“From the above it is evident that the resident/inhabitants are offered a unit i.e. a portion of a room with a cot on monthly rental basis. Further, monthly rent also is charged and collected for the unit only but not for the residential dwelling. Thus, the impugned accommodation being provided does not qualify to be a residential dwelling. Further it is seen that units are shared by one or more unrelated inhabitants. Applicant charges all the inhabitants of a room individually and not for a room as a whole. It is apparent from the above that the accommodation provided to each of the inhabitant is not a residential dwelling but a cot / a unit in the room; un-related people share the said room and invoices are raised per bed on monthly basis are not characteristic of a residential dwelling.

Further, it is also an admitted fact that the accommodation being provided by the applicant, out of the immovable property claimed as residential dwelling, does not have individual kitchen facility to each of the inhabitant and also cooking of food by inhabitants is not allowed, which are an essential characteristic for any permanent stay. On this count as well, the impugned accommodation being provided does not qualify to be a residential dwelling and thus the question of using the same as residence does not arise.”

The reliance of the applicant on judgment of Hon’ble High Court of Karnataka in the case of Taghar Vasudeva Ambarish (WP No.14891 of 2020 (T-Res) dated 7th February, 2022) – 2022-VIL-110-KAR was differed by the ld. AAR on the grounds that it is appealed before Hon. Supreme Court as well as on grounds that facts are different. The ld. AAR held the activity taxable and determined rate @ 12 per cent in terms of entry number 7(1) of Notification no.11/2017-Central Tax (Rate) dated 28th June, 2017, as amended. The ld. AAR also held that applicant is entitled to ITC as per law.

28. GST Liability on Canteen recovery

M/s. Tube Investment of India Ltd. (AR Order No.12(A)/2023-24 in App. No.07/2022-23 dt. 22nd December, 2023 (Uttarakhand)

The background facts are that originally, appellant applied for ruling on certain questions.

The ld. AAR vide its order in 12/2022-23 dt. 24th November, 2022 ruled as under:

“a. Whether the nominal amount of recoveries made by the Applicant from the employees who are provided food in the factory canteen would be considered as a ‘Supply’ by the applicant under the precisions of Section 7 of Central Goods and Service Tax Act, 2017 – Yes, it is a supply.

b. Whether GST is applicable on the amount recovered from the employees for the food provided in the factory canteen or on the amount paid by the Applicant to the Canteen Service Provider – GST is applicable on both the amount i.e. amount paid to the canteen service provider and also on the nominal amount recovered from the employees.

c. Whether input tax credit (ITC) is available on GST charged by the Canteen Service Providers for providing the catering services at the factory where it is obligatory for the Applicant to provide the same to its employees as mandated under the Factories Act, 1948, even if the answer to question (a) is ‘No’? – Benefit of ITC is not admissible on the GST on the amount paid to the canteen service providers and also on the amount recovered from the employees.

d. Whether input tax credit (ITC) can be availed on GST charged by the Canteen service providers, the answer to the question (b) is ‘Yes’? – No, ITC is not admissible on the GST on the amount paid to the canteen service providers.”

Not satisfied with the ruling of the advance ruling, an appeal was filed before the Appellate Authority for Advance Ruling, Goods & Service Tax, Uttarakhand. The ld. AAAR decided appeal vide Order No. 05/2022-23 dated 13th March, 2023.

The ld. AAAR remanded matter back to ld. AAR to determine application afresh taking cognisance of CBIC Circular No.172/04/2022-GST dated 6th July, 2022. Therefore, this fresh ruling.

The ld. AAR observed that the applicant is a leading engineering company engaged in manufacture of precision steel tubes, etc., and in a factory in the state of Uttarakhand, more than 500 workmen (both direct and indirect) are employed. It is also noted that the applicant recovers nominal amount from the employees on a monthly basis to provide food to them and for same, they have engaged contractors, who operate canteen within the factory premises. It is also noted that the applicant discharges GST @5 per cent on the taxable value which is sum total of the cost of the canteen service provider plus 10 per cent notional mark up. Further, the applicant does not avail input tax credit (ITC) on the expenses incurred on the services provided by the canteen service provider, and it is absorbed as a cost in the books of accounts.

The ld. AAR observed that the clarification is sought as to whether GST is liable to be paid on that part of the amount which is collected from their employees towards provision of food and also whether ITC is available on the GST paid by them on the taxable value of the canteen service. The ld. AAR observed that the contention of applicant is based on premises that the supply of food in canteen is part of employment contract and hence ousted from the scope of supply vide the Entry 1 in Schedule III of the CGST Act, 2017. Therefore, there is no supply between the Applicant and the employees. Further, the amount received from the employees is in the nature of recovery and not consideration.

As per direction of ld. AAAR in appeal order, the ld. AAR referred to Circular no.172/04/2022-GST dt. 6th July, 2022 and particularly to clarification given at Sl. No.5 in said circular.

The ld. AAR observed that as per the said circular, perks provided in terms of contractual agreement are not supply under GST which means that if any perks are provided to the employee, in terms of contractual agreement, then such perks are outside the purview of GST.

The ld. AAR observed that if any perk / privilege is mentioned in the employment contract, then it becomes binding for the employer to provide the same to the employees but anything provided beyond the employment contract is a part of sweet will or largesse on the part of employer and cannot be insisted upon by an employee.

The ld. AAR found that consuming food at the canteen facility made available by the applicant in their premises is not mandatory and it is purely optional for the employees and that while extending the canteen facility, no meal is extended free but the meals / food are provided at concessional rates.

The ld. AAR observed that although the provision of food in canteen is on account of the mandate prescribed in the Factories Act, 1948, the supplies are provided by the employer to the employees for a consideration, though nominal. The ld. AAR held that it is taxable supply.

Referring to provisions of Factories Act, 1948, the ld. AAR also held that such supply is in course of business, being incidental to business activity of applicant.

The further contention that making recovery is not consideration but recovery of cost also negatived by the ld. AAR on grounds that such recovery fulfils the definition of “consideration” given in section 2(31) of CGST Act.

In relation to availability of ITC, the ld. AAR observed as under:

“So in the instant case, the flow of the transaction is that the Canteen Contractor is providing service to the applicant, which is classifiable as Restaurant Service and the applicant himself is also providing same service to its worker, as mandated in the Factories Act, 1948 i.e. he is also providing a Restaurant Service to its worker. As already brought out above, the Restaurant Service, compulsorily attracts GST rate of 5% without ITC, in a non-specified premises and the applicant’s premises is not a specified premises in terms of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017. Therefore, though the Section 17(5) of the CGST Act, 2017, does not debar availment of ITC in entirety, but in the present case availment of ITC is debarred in terms of provisions of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 as amended vide Notification No. 20/2019- C.T. (Rate) dated 30.09.2019.”

In respect of all above issues, the ld. AAR also relied upon order in appeal passed by the ld. AAAR, H.P.

The ld. AAR accordingly ruled that recoveries in canteen for foods are taxable supply and no ITC is eligible.

Goods and Services Tax

HIGH COURT

Ashoka Fabricast Pvt. Ltd. vs. Union of India [2024] 20 Centax 105 (Raj.)

Dated: 1st May, 2024

39. GST Audit can be conducted under section 65 of the CGST Act even after cancellation of registration of taxpayer.

FACTS

Petitioner had applied for cancellation of GST registration, and the same was cancelled on 16th January, 2020. Further, petitioner was served with a notice for conducting GST Audit for the period from July 2017 to March 2020 on 6th March, 2023. Thereafter, SCN was issued on 1st June, 2023 and detailed reply was filed by the petitioner. Subsequently, an order was passed by respondent confirming the demand. Hence, the petitioner preferred this petition challenging initiation of Audit post cancellation of registration.

HELD

Hon. High Court held that section 29(3) of the CGST Act clearly states that cancellation of registration does not affect the liability of the taxpayer. The Court further stated that audit can be conducted for those past periods when registration was active as per section 65(1) of CGST Act. Accordingly, writ petition was disposed of.

Contrary view: Tvl. Raja Stores vs. The Assistant Commissioner (ST) — MANU/TN/6752/2023]

Unitac Energy Solutions (India) Pvt. Ltd. vs. Assistant Commissioner (ST)
[2024] 21 Centax 141 (Mad.) Dated: 3rd July, 2024

40. Recovery proceedings should be kept in abeyance till disposal of application for waiver of interest and penalty as per recommendations made in 53rd GST Council Meeting and subsequent notification giving effect to the same.

FACTS

Demand order was confirmed against petitioner for period from 2017–18 to 2021–22. Petitioner had discharged entire tax liability and a certain portion of interest by filing an application opting to pay demand amount in installment. This was pursuant to recommendation made in the 53rd GST Council Meeting regarding waiver of interest and penalties for demand raised under section 73 for A.Ys. 2017–18 to 2019–20, if full tax is paid by 31st March, 2025. However, respondent wanted to recover the dues hurriedly. Being aggrieved, petitioner preferred this petition before Hon’ble High Court.

HELD

High Court directed to keep the recovery proceedings in abeyance for a period of 60 days in the light of recommendations made in 53rd GST Council Meeting and corresponding notifications. Accordingly, petition was disposed of.

National Plasto Moulding vs. State of Assam [2024] 21 Centax 182 (Gau.)

Dated: 12th August, 2024

41. ITC cannot be denied to recipient of goods merely because supplier has failed to deposit the tax collected from recipient to the Government.

FACTS

Petitioner was issued an SCN under GST Law demanding disallowance of ITC on account of failure of supplier to discharge GST liability to the Government. Petitioner had already paid GST amount to supplier. However, respondent sought to deny ITC on the grounds that GST amount was not remitted to Government by supplier of petitioner. Being aggrieved by proposal to deny ITC in SCN, petitioner filed the present writ before Hon’ble High Court.

HELD

High Court squarely relied upon the judgement of Delhi High Court in the case of On Quest Merchandising India Private Limited vs. Government of NCT of Delhi (2017) 87 taxmann.com 179 (Delhi) held that a purchasing dealer cannot be punished for the failure of the selling dealer to deposit the tax collected. The Court emphasised that the tax authorities should initiate recovery proceedings against the defaulting selling dealer instead of denying ITC to purchasing dealer. Accordingly, SCN proposing to disallow ITC in the hands of petitioner was quashed.

Shree Om Steel vs. Additional Commissioner

Grade-2 [2024] 21 Centax 19 (All.)

Dated: 19th July, 2024

42. SCN cannot be issued for confiscation of goods invoking section 130 of CGST Act, 2017 solely on the basis of mismatch of quantity of goods lying in godown and as per records in books of accounts during survey.

FACTS

Petitioner, a registered dealer, is engaged in the business of trading of iron & steel. A survey was conducted at the business premises of petitioner where goods lying in godown were found to be more than quantity of goods recorded in the books of account. SCN was issued on 4th November, 2020 for confiscation of goods under section 130 of CGST Act, 2017 read with penalty under section 122 of UPGST Act, 2017. Subsequently, an order was passed on 20th November, 2020 for the confiscation of goods and imposition of penalty. On filing the appeal against said order, the appeal was dismissed by Appellate Authority. Being aggrieved, petitioner preferred this writ before Hon’ble High Court.

HELD

High Court ruled that confiscation of goods and imposition of penalty by initiating proceedings under section 130 of the UPGST Act, alleging excess stock found based on mismatch between the quantity of stock found in godown and that recorded in books of account during survey is not tenable. The Court relied upon the decision of Metenere Limited vs. Union of India & Another [2020 NTN (74) 574] where it categorically stated that demand should be quantified and raised as per only sections 73 and 74 of the CGST Act. The Court referred to the decision of M/s. Maa Mahamaya Alloys Pvt. Ltd vs. State of U.P. & 3 Others [Writ Tax No. 31/2021, decided on 23rd March, 2023] and concluded that proceedings under section 130 of CGST Act cannot be initiated where time of supply to pay GST has not arrived and there was no intent to evade payment of tax. Thus, impugned order demanding tax and imposing penalties was quashed and, thus, petition was allowed.

Sona Infracon Pvt. Ltd. vs. Directorate General

of GST Intelligence

[2024] 20 Centax 159 (Pat.)

Dated: 9th May, 2024

43. Intimation / SCN issued by DGGI cannot be challenged on the grounds that they are incompetent or beyond their jurisdiction.

FACTS

Petitioner was issued an SCN by Additional director of DGGI (Respondent) under section 74(5) of CGST Act, 2017. Petitioner was of the understanding that respondent was not a proper officer to issue the SCN under 74(5) of CGST Act. Accordingly, petitioner challenged such SCN issued by respondent, before this Hon’ble High Court.

HELD

Hon’ble High Court relying on Circular No 169/01/2022-GST dated 12th March, 2022 held that Central Tax officers of Audit Commissionerates and Directorate General of GST are competent to issue SCN under section 74(5). Accordingly, writ petition was disposed of in the favour of revenue.

Power Grid Corporation of India Ltd vs. State of Rajasthan

[2024] 165 taxmann.com 80 (Rajasthan)

Dated: 18th July, 2024

44. A person liable to pay tax on a reverse charge is deemed to be a supplier for the purpose of filing of application under Advance Ruling provisions. Where an application is rejected as not maintainable, the writ petition filed before the High Court against such order is maintainable.

FACTS

The petitioner is engaged in transmission of electricity. During the course of business, the petitioner engages contractors who would transport goods and raises invoices for transportation. The petitioner filed an application for an advance ruling on the issue as to whether in the facts of the case, transportation of goods is exempt under Serial No.18 of Notification No. 12/2007-Central Tax (Rate). In case of non-applicability of the exemption notification, the petitioner would be liable to pay tax on a reverse charge basis, the services being in the notified category. The AAR held that application under section 97 of the Central Goods and Service Tax Act, 2017 (for short ‘CGST Act’) is not maintainable, as the petitioner was not the supplier.

HELD

As regards the maintainability of the petition, the Hon’ble Court held that no appeal is provided against the rejection of the application under section 98(2) of the CGST Act. The application of the petitioner was ousted at the threshold under section 98(2) is not maintainable. The section is unambiguous that an appeal can be filed only against the orders pronounced under section 98(4) of the CGST Act. Hence, the writ petition is maintainable. The Hon’ble Court further held that the recipient liable to pay tax on a reverse charge basis is given a deeming fiction of supplier for the purpose of payment of tax. Hence, the fiction under section 9(3) of the CGST Act has to be given full play, by bringing the dealer liable to pay tax on a reverse charge basis within the ambit of Chapter XVII for seeking an Advance Ruling.

Aberdare Technologies (P.) Ltd vs. Central Board of Indirect Taxes and Customs [2024] 165 taxmann.com 325 (Bombay) Dated: 29th July, 2024

45. There were certain errors in the GST returns filed by the petitioner. The Hon’ble Court permitted the petitioner to amend and rectify GSTR-1 by directing the department to open the GST portal / accept and process the application for rectification manually. The Hon’ble Court relied upon to the decision in the case of Star Engineers (I) Pvt Ltd. vs. Union of India & Ors. 2023 SCC Online Bom 2682.

Note: In Star Engineers’ case (supra), the Hon’ble Supreme Court discussed factors to be borne in mind when considering the cases of inadvertent human errors creeping into the filing of GST returns. The Hon’ble Court held that the assessee cannot be prevented from placing the correct position and having accurate particulars in regards to all the details in the GST returns being filed by the assessee, and it cannot be said that there would not be any scope for any bonafide, and inadvertent rectification / correction. It was further held that the intention of the legislature as borne out on a bare reading of section 37(3) and section 39(9) in the category of cases when there is a bonafide and inadvertent error in furnishing any particulars in the filing of returns, accompanied with the fact that there is no loss of revenue whatsoever in permitting the correction of such mistake. Any contrary interpretation of section 37(3) read with sub-sections (9) and (10) of section 39 would lead to absurdity and / or bring a regime that GST returns being maintained by the department having incorrect particulars become sacrosanct, which is not what is acceptable to the GST regime, wherein every aspect of the returns has a cascading effect.

Kabir Traders vs. State of Maharashtra [2024] 165 taxmann.com 381 (Bombay) Dated: 22nd July, 2024

46. An adjudication order passed rejecting the letter filed by petitioner’s Chartered Accountant, without assigning any reasons, was quashed and the matter was remanded for fresh adjudication.

FACTS

The petitioner received the order dated 8th December, 2023. On its perusal, it was found that a letter by petitioner’s Chartered Accountant was not accepted by the office. Also, the reason for the same for not considering the said letter was not clearly mentioned. The petitioner therefore challenged the said order in Writ Petition.

HELD

The Hon’ble High Court noted that a letter by petitioner’s Chartered Accountant was not accepted by the office without assigning any reason. Further, before the Hon’ble Court, the Council for the department fairly admitted that it was a genuine case of hardship to the petitioner. Consequently, the Hon’ble Court remanded the matter for de novo consideration. Further, the Order passed consequent upon the adjudication order debiting the petitioner’s cash ledger / ITC ledger was also quashed and ordered to be reversed / refunded.

Malindo Airway SDN BHD vs. State Tax Officer

[2024] 165 taxmann.com 319 (Madras)] Dated: 23rd July, 2024

47. The Passenger Service Fees (PSF) and User Development Fees (UDF) collected by the petitioner from the passengers through its General Sales Agents (GSAs), on behalf of the Airport Authority of India and remitted to them on an actual basis are taxable only in the hands of the Airport Authority of India and not in the hands of the airline as clarified in Circular No. 115/34/2019-GST, dated 11th October, 2019.

FACTS

The petitioner, an airliner, is engaged in the transportation of passengers and cargo through its flights. The petitioner collected PSF and UDF from the passengers along with Ticketing Charges with GST which is paid to the Airport Authority of India as a pure agent. The dispute arose on the taxability of GST on the said PSF and UDF in the hands of the petitioner. The petitioner contended that be- ing a pure agent, they are not liable to discharge GST on the said amounts.

HELD

The Hon’ble Court held that prima facie, the petitioner may not be liable to pay tax on such PSF and UDF as the peti- tioner is requested to collect these amounts for the Airport Authority of India as its “agent”. The Court also referred to the CBIC Circular No. 115/34/2019-GST [F.No.354/136/2019-TRU) dated 11th October, 2019 and held that the amount that are collected by the petitioner from the passengers through its GSAs are taxable only in the hands of the Airport Author- ity of India. However, if any other separate charges were collected by the petitioner for acting as a pure agent of the Airport Authority of India, such service may be liable to tax in the hands of the petitioner. The Hon’ble Court further held that if the petitioner has availed input tax credit on the ser- vice tax collected from the passengers towards the PSF and UDF, the petitioner would be liable to reverse the same.

Valuations of Corporate Guarantee

In the January 2024 issue of the BCAJ, we have examined the fundamental concepts of guarantee and the tax challenges hovering over corporate guarantees. It was acknowledged that mere legislative insertion of valuation rules by the 52nd GST Council does not put to rest the question over taxability of such corporate guarantees between related persons. On an application of the provisions of the Contract Act, one could have firmly viewed it as a rendition of service (if at all) by the Surety to the Principal Creditor and the flow of consideration (being the financial loan / assistance) by such Creditor to the Principal Debtor. Therefore, the service was being rendered by Parent Companies to the Banks / FIs (as a principal creditor) rather than its related entity (also emerging from CBIC Circular No. 204/16/2023-GST). The revenue’s interpretation of invoking the deeming fiction of Schedule I between related persons seemed to be misplaced. The true nature of contract between Surety and Principal Debtor (being related entities) is that of an implied ‘contract of indemnity’ where the debtor is bound to indemnify any loss which the surety may incur in case the guarantee was invoked by the Principal Creditor.

The 53rd GST Council has once again overlooked the fundamental principles of Corporate Guarantees and has tweaked the valuation rules on the mistaken understanding that the transaction is deemed to be a service between related entities. Be that as it may, the objective of this article is to only examine the valuation provisions in light of the 53rd Council meeting, on the Council’s presumption that corporate guarantees are taxable (a) as a supply of service between related entities; and (b) the consideration for such service is to be performed as per valuation norms.

Backdrop of Valuation provision

We all know that “Value of Supply of Guarantee services” u/s 15(1) would be the ‘transaction value’, i.e. the price actually paid or payable for the said supply where the supplier and the recipient are unrelated and price is the sole consideration for such supply. In normal circumstances where a specific price is charged by the Guarantor from the recipient of its service, such transaction value would form the value of supply. However, in two specific circumstances, valuation rules are invokable; (a) supply is between related entities in which case the price is not deemed to be a sole consideration (section 15(4)); (b) Value of supplies as are notified by the Government in terms of valuation rules (section 15(5)). Rule 28 has been incorporated for valuation of supplies between related / distinct persons with an intent to arrive at the arm’s length price and negate the probable influence of the relationship over the valuation. It provides that the value would be the ‘open market value’; ‘comparable value of similar services’; ‘cost of service’ or similar methodology (applied in the same sequence). In terms of a proviso, in cases where the recipient is eligible for full input tax credit, the value as declared in the invoice would be considered as the ‘open market value’ and adopted for the purpose of value in terms of Rule 28.

The 52nd GST council introduced an overriding Rule 28(2) (vide Notification 52/2023 w.e.f. 26th October, 2023) stating that value of a supply of corporate guarantee service between related person would be fixed 1 per cent of the guarantee offered or the actual consideration, whichever is higher. Thereby, the open market value mechanism of ascertaining the value of a corporate guarantee service was rendered inapplicable and the Guarantor had to necessarily deem the value at 1 per cent of the sum guaranteed. In view of this specific overriding rule 28(2), the benefit of proviso to Rule 28(1) in cases of full input tax credit was also not made available for valuation of corporate guarantees. Singling out corporate guarantees from the benefit of zero- valuation in full ITC cases was unknown and taxpayers were ultimately left to the mercy of the ad-hoc valuation of 1 per cent. This amendment in valuation rules gave impetus to the revenue to allege that Corporate Guarantees are a ‘taxable service’ under section 7 r/w 9 of the GST law. The summary of revenue’s approach to taxation was as follows:

Taxability Valuation
Pre-GST No consideration – Not taxable in view of Edelweiss (SC)
1st July, 2017 to 26th October, 2023 Open Market Value – Proviso benefit not available since no invoice (later clarified)
26th October, 2023 onwards 1 per cent or Actual Value w.e.h. in all cases

Retrospective amendment: 53rd Council decision

The said amendment ignited widespread investigation and arbitrariness (in valuation methodology) with imposition of either RCM / FCM tax depending on the location of related entities. Ancillary questions were then raised by the industry on (a) frequency of the taxability; (b) base value for purpose of application of 1 per cent, etc. The 53rd GST council took cognizance over these issues and introduced a retrospective amendment in Rule 28(2) which now reads as follows (underlined terms inserted
w.r.e.f from 26th October, 2023):

(2) Notwithstanding anything contained in sub-rule (1), the value of supply of services by a supplier to a recipient who is a related person located in India, by way of providing corporate guarantee to any banking company or financial institution on behalf of the said recipient, shall be deemed to be one per cent of the amount of such guarantee offered per annum, or the actual consideration, whichever is higher.

Provided that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the value of said supply of services.

The three retrospective insertions to Rule 28(2) made are as follows:

– Valuation is fixed at 1 per cent of the guarantee offered on a ‘per annum’ basis;

– Beneficial valuation mechanism in case of full input tax credit is reintroduced;

– Insertion of the condition that the related person should be located in India;

Rationale for fixation of 1 per cent per annum as the deemed value — Corporate guarantees are contracts which may not necessarily be driven by time. The contract commences on the emergence of a financial obligation and ends on discharge of such obligation. The tenure may be subject to early termination or even extension on mutual terms. The insertion of the phrase involves fixation of a deemed value of 1 per cent on a ‘per annum’. CBIC Circular No 225/19/2024-GST states that the phrase ‘per annum’ has been inserted to tax the service on an annual basis until the discharge of the credit facility.

This decision was taken on account of varied practices among taxpayers as well as revenue administration on the valuation of corporate guarantee. Tax-payers followed Transfer Pricing methodologies such as a Yield approach, Cost approach, Expected loss approach, Capital support approach. Revenue’s approach involved some arbitrariness of adopting commission charged by Banks, thumb rules or publicly available rates. Due to large scale variations, the GST council thought it appropriate to fix a deemed value of 1 per cent of the guarantee amount by amending Rule 28(2), thus allaying any disputes on valuation. Though such a value may not necessarily reflect the arm’s length value, in the absence of a scientific approach to value guarantee commissions and a lack of an open market value, taxpayers were forced to adopt this approach to avoid litigation. The revenue on the other hand would treat this insertion as vindicating its stand of a thumb rule approach of 1 per cent of the guarantee for valuation of the services prior to said amendment.

The other aspect is on the taxation of corporate guarantees on a ‘per-annum’ basis. Conceptually, the contract of guarantee is a one-time activity having a validity over a specific time period or fulfillment of the loan obligation. Guarantee fee could vary based on probability of default risks (computed based on sovereign risks, economic risks, industry risks, credit risks, etc.), but this insertion has singled out only the time factor for ascertainment of appropriate value. Legally, the finer aspect of identifying the taxable event (a.k.a. subject matter of tax) seems to have been lost in this amendment. In a service of guarantee, the risk underwritten by the Guarantor is subject matter of tax. This risk is underwritten only once (as a one-time activity) by endorsing the contract of guarantee. As a condition of this endorsement, the guarantor takes over a financial obligation for a particular tenure. Viewed from another angle, the underwriting of risk is governed by the contract tenure and does not have to expire and be renewed at the end of each year. Even if a comparison is drawn with Banks / FIs, the concept of charging a guarantee commission on an annual basis is not a rule but driven by commercial agreements only. But the current amendment makes charging of a guarantee fee an annual exercise as a mandatory rule and overlooks economic and commercial reality.

Accordingly, the rule represents that the arm’s length price should be a direct function of the tenure of guarantee and hence prescribed a valuation on a per-annum basis. So, where the guarantee is for a 6-month period, the valuation should be proportionately reduced to 0.5 per cent and where it is for a 5-year period, the value would be 5 per cent. This theory seems to be flawed fundamentally:

– It fails to appreciate that rendition of a guarantee is distinct from the underlying financial obligation which is underwritten by the contract;

– It assumes that guarantee service is reset at every 12-month period;

– It attempts to define the contractual terms of a guarantee service, which is clearly not a legislative authority, rather a mutual contract between the parties concerned;

– It treats unequals as equals by equating the minimum guarantee commission at 1 per cent for all cases without appreciating commercial considerations (financial capabilities of the debtor/ creditor, macro-economic factors, prevailing interest rates, recovery risk, etc.);

Rationale for granting the benefit of valuation in cases full input tax credit – Without going into the rationale of depriving the ‘guarantee transactions’ with this benefit previously, the GST council in its wisdom has now extended such benefit in cases where full input tax credit at the recipient’s end. By insertion of a proviso, it is stated that the value as declared in the invoice would be accepted as the arm’s length value in cases where full input tax credit is otherwise eligible to the recipient, thereby equating Rule 28(2) with Rule 28(1). The debate on whether ‘full input tax credit’ must be examined at an invoice or at the registration level would continue even for corporate guarantees.

CBIC Circular No. 225/19/2024-GST affirms that this rule would apply retrospectively from 26th October, 2023. Despite this deemed value, on application of CBIC Circular No. 210/4/2024-GST, NIL value can now be adopted by not raising any self-invoice in case of import transactions. Even if a self-invoice is supposed to be raised, in terms of CBIC Circular No. 211/5/2024-GST, the date of raising the self invoice would be treated as the starting point of time of eligibility for input tax credit. The above culminates into narrowing down the operation of deemed valuation of corporate guarantees only to non ITC / exempt sectors such as residential real estate, restaurants, health care or other exempt services.

Rationale on restricting Rule 28(2) to related persons located in India – CBIC C ircular 225/19/2024-GST merely states that Rule 28(2) would not henceforth apply for export transactions but falls short to clarify over applicability of Rule 28(1) for such transactions. By excluding the application of Rule 28(2) for outbound guarantees, the default Rule 28(1) comes back into contention & becomes applicable. In such cases, one would have to fall back upon the open market value, comparable supplies of similar services or similar methodology for ascertainment of value for export of corporate guarantee services. The ad-hoc valuation of 1 per cent cannot then form the basis of valuation for such outbound guarantee services. However, the entity may consider the possibility of claiming the zero-rating benefit provided under Section 16 of the IGST Act, 2017. It may be noted that the definition of export of service requires an exporter of service to repatriate the consideration in convertible foreign exchange. Admittedly, in such cases, though there is a taxable value of supply, the consideration is NIL and therefore the said condition can be said to be satisfied.

Peculiar cropping up under the CBIC Circular 225/19/2024-GST

The CBIC Circular issued pursuant to 53rd Council recommendations are clearly overreaching the legal understanding emerging from statutory provisions. Some of them are discussed herein:

i. Impact of amendment over pre-existing Corporate guarantees prior to 26th October, 2023. The circular states that pre-existing corporate guarantees would be governed by the erstwhile law and not by the amended law. The amended law would govern only fresh issuances or renewal of pre-existing guarantee after 26th October, 2023. The pre-existing valuation rules (i.e. open market value, etc.) would govern old guarantees i.e. corporate guarantees issued prior to 26th October, 2023 would be subject to generic open market value without the condition of valuation on a per-annum basis but those issued on or after 26th October, 2023 would be subjected to the 1 per cent valuation calculated on a per-annum basis. Clearly, this position of the Government would emerge only after considering that taxable supply is the act of underwriting the default risk, such an activity being a one-time supply and not a continuous or recurring supply. Being a one- time supply, pre-existing guarantees would continue to be governed by the old valuation rules. But this very understanding seems to be overturned when the same circular later states that valuation of corporate guarantees are to be performed on a per-annum basis.

ii. Valuation of corporate guarantees in case of part disbursement – The circular states that the subject- matter of taxation is the underwriting of default risk and not the loan/financial assistance. Therefore, even if the loan is not completely disbursed, the valuation would be on the entire amount of guarantee. Clearly there is a conflict in the very statement of the circular. In a corporate guarantee of ₹1 crore, if the actual disbursement is ₹75 lakhs, then default risk would be to the extent of ₹75 lakhs and not ₹1 crore. Yet the circular claims that the valuation would be on the complete guarantee amount, failing to appreciate that limit specified in the contract of guarantee is the upper limit and non-usage of such limit cannot result in a default risk to the Guarantor. This approach also fails to appreciate the contract law provisions which states that the financial credit is basis of consideration for the guarantee rendered by the Surety.

iii. Assignment of corporate guarantee to another Bank / FI – The circular states that pre existing assignment guarantee would not be taxable once again even at the time of takeover of loan as long as there is no fresh issuance / renewal of the guarantee. Where a fresh agreement is entered with any revision in terms, despite the underlying loan being in continuance, the said circular would treat it as a fresh guarantee. The clarification does not also seem to be well thought out. According to this clarification, it seems that the transaction of assignment would not be a taxable event unless there is a renewal of the entire arrangement. Even though the recipient of the guarantee / default risk (i.e. the principal creditor) would be an entirely different entity, the government believes default risk is not taxable once again. Certainly, there are going to be disputes over whether the true nature of the take-over of the financial credit has been performed by way of ‘assignment’ or ‘fresh issuance’.

iv. Co-guarantee arrangements – The circular suggests that guarantee would be proportionately charged based on default risk which undertaken by the guarantors. In many arrangements, the co-guarantors are surety for the entire amount of loan jointly or severally without any bifurcation. The circular does not provide any particular solution to this and the revenue would sway towards applying common 50:50 rule which would lack statutory force. It would be interesting on how the circular would apply where the parent company and its promoter directors are looped as co-guarantors in the entire loan arrangement. CBIC Circular 204/16/2023-GST would state that personal guarantees by directors would not be taxable in view of the RBI’s restriction on charge of any kind guarantee fee by Bank / FIs.

Is there a possibility to challenge these valuation rules?

Certainly, the said valuation rules can be challenged based on arbitrariness. We have the instance where a valuation rule in Customs was struck down by the Supreme Court in Wipro’s case1 on the basis that a fictional value cannot replace an actual value. A 1 per cent arbitrary handling charge was read down when actual values were available with the importer. Similarly, Gujarat High Court2 in Munjaal Manishbhai’s case also read down the mandatory 1/3rd deduction towards land for arriving at the value of construction services. The ad-hoc 1 per cent value towards Corporate Guarantee could face a similar challenge before Courts as it disregards the commercial reality. It also exceeds its authority by holding that such a value should be computed on a per-annum basis disregarding the very nature of guarantees. Incidentally, the said rule has been challenged in the case of Sterlite Power Transmission3 that the valuation rules are proposing a tax on an activity which is not taxable itself under section 9. Currently a stay on the Circular has been granted in another case of Acme Cleantech Solution (P) Ltd4 where the arbitrariness in valuation was challenged in the said case.

1. Wipro Ltd 2015 (319) E.L.T. 177 (S.C.)
2. MunjaalManishbhai Bhatt2022 (62) G.S.T.L. 262 (Guj.)
3. [2024] 160 taxmann.com 381 (Delhi)
4. [2024] 162 taxmann.com 151 (Punjab & Haryana)

Retrospective impact of amendment – The retrospective amendment would be applicable from 26th October, 2023. In many cases, the tax-payers would have fixed a 1 per cent fee on account of lack of the beneficial Full ITC condition. Assessments / orders would have been issued even in cases where ITC would otherwise be fully available. Pursuant to such retrospectivity, sectors which were subject to full ITC need not continue with this practice and re-align their valuation to commercial reality rather than the ad-hoc scheme. In case of Non-ITC sectors the taxpayers would be forced to reset the valuation to 1 per cent p.a. or alternatively challenge the levy itself.

A foot in the wrong direction by the GST council has only made the issue more ambiguous. The GST council should attempt to dig into the root of the transaction and not shy away from fixing the service provider recipient problem statement. Moreover, with the full ITC condition being reintroduced, the impact would only be restricted to a few sectors albeit a bag full of confusion. In the meanwhile, the Courts are already seized of this issue and one would hope that the dust on this matter is settled soon.

Part A | Goods and Services Tax

HIGH COURT

33 AU Finja Jewels vs. Assistant Commissioner Div. V CGST and Cx.

[2024] 164 taxmann.com 278 (Bombay)

Dated 21st June, 2024

Where the invoice issued to the customer indicates the gross value of the jewellery and also shows a reduction in respect of the gold supplied by the customer free of cost, the value as per GST invoice for the purpose of computing refund should be the gross value and the value of gold supplied free of cost can be treated as a payment in advance.

FACTS

Petitioner is a jewellery processor and manufacturer of jewellery and in the course of his business, imports gold and exports gold jewellery in accordance with the Foreign Trade Policy of the Government of India. The issue that arises in this petition is, what is the value of the goods that have to be considered while working out the refund of Integrated Goods and Services Tax (IGST) to be sanctioned? The FOB value as per the invoice was USD 2,24,846.75. However, the net realisable value after considering the value of gold supplied by the customer free of cost was USD 6,479.39. The department considered net realisable value as the value of goods declared on the export invoice.

HELD

The Hon’ble Court held that the value of export goods should be considered as the gross value and the value of gold given by the customer free of cost should be treated as advance payment.

34 Fabricship (P.) Ltd vs. Union of India

[2024] 164 taxmann.com 80 (Bombay)

Dated 21st June, 2024

When imported machinery under ECPG scheme is transported from the port to the petitioner’s factory, there is no supply and hence in the absence of any evidence that the goods were being supplied to a third party, the penalty under section 129(1)(a) is not payable. However, such a movement will qualify as an “exempt supply” to attract a penalty under section 129(1)(b) of the Act. As sections 129(1)(a) and 129(1)(b) are mutually exclusive, an order imposing penalties under both sections is an order without application of mind.

FACTS

The petitioner imported machinery at port from China which was fully exempted since it was covered by the EPCG scheme. Petitioner, thereafter, arranged a transporter to transport the said machinery from the port to its factory at Surat. The said vehicle was intercepted in Maharashtra and it was found that no e-way bill was prepared. However, the Bill of Entry accompanying the vehicle contained all the details. The State GST authority imposed a penalty under section 129(1)(a) and under section 129(1)(b) of the MGST Act. The petitioner submitted that as there was no Customs duty or IGST liability since goods are exempt under notification no.16/2015-Customs read with notification no.18/2020-Customs, the penalty was not imposable. The petitioner also informed that it had given a bank guarantee; however, the said bank guarantee has expired and has not been renewed.

HELD

The Hon’ble Court observed the fact that the machinery imported is exempted from Customs duty and IGST and that the machinery was being transported from port to the petitioner’s own factory at Surat post clearance by the Customs Authorities is not disputed. Further, there is no evidence indicating the movement of machinery to the outside buyer out of the State of Maharashtra. The Hon’ble Court held that when the petitioner imports machinery and after Customs clearance transports the said machinery to its own factory, it cannot be said that such a transportation would fall within the definition of the term supply’ as defined by section 7 as for a ‘supply’ to fall under section 7 there has to be more than one person or entity between whom the transaction of supply should take place. It further held that the movement of goods cannot fall under schedule I, II and III of the Act. The Hon’ble Court held that the applicability of the rate of tax would get triggered only if a transaction falls within the meaning of the term ‘supply’ as per section 7 of the MGST Act. Therefore, the first limb of Section 129(1)(a) is not applicable. However, when a person transports the goods imported, after Customs clearance to his own factory premises then it is a non-taxable supply and would fall within the category of “exempted goods” as it does not attract tax and consequently, the case will be covered within the second limb of section 129(1)(b) of the Act attracting the penalty of ₹25,000 in the present case.

On the simultaneous imposition of penalty under sections 129(1)(a) and 129(1)(b), the Hon’ble Court held that both these provisions are mutually exclusive and hence order imposing penalty under section 129(1)(a) as well as under section 129(1)(b) is an order passed without application of mind. Since the petitioner failed to keep the bank guarantee in force, the Hon’ble Court imposed a cost of R15 lakh on the petitioner.

35 Pedersen Consultants India (P.) Ltd vs. Union of India

[2024] 164 taxmann.com 67 (Delhi)

Dated 19th March, 2024

When the petitioner was forced to pay GST on invoices due to the non-filing of returns by the supplier and subsequently, the supplier filed the returns, thereby creating a scenario of double tax payment to the Government, the Hon’ble Court permitted the petitioner to file the refund application.

FACTS

Petitioner had been coerced into depositing the tax on the said invoices as the supplier had not filed returns within time. Subsequently, the said supplier filed the returns and consequently, double payment was made to the department. The claim of the petitioner was not considered as petitioner did not file an appropriate refund application as required under section 54 of the Central Goods & Service Tax Act, 2017.

HELD

Assessee / Petitioner was directed to file a refund application under section 54 of the Central Goods and Services Tax Act, 2017. However, relying on Notification No.13/2022 dated 5th July, 2022, the period between 1st March, 2020 to 28th February, 2023 was directed to be excluded for computation of period of limitation. Also, the period between filing of the subject petition till the passing of the High Court’s order was also directed to be excluded for filing the refund application.

36 Amarjyothi Carrying Corporation vs. Assistant Commissioner (ST)

[2024] 164 taxmann.com 11 (Madras)

Dated 20th March, 2024

Where the entire tax liability has arisen on account of an inadvertent error committed while filing the GSTR 1 return which was subsequently rectified in GSTR-3B and GSTR-9 return and the petitioner did not submit the reply before the authorities in time, the Hon’ble Court thought it just and proper to remand the matter setting aside the impugned Order.

FACTS

While filing the GSTR 1 return for the month of October 2019, it is stated that the petitioner inadvertently failed to indicate that GST was leviable on the service on reverse charge basis. However, this mistake was corrected in the GSTR 3B return for the relevant month and also in the annual GSTR 9 return. The department recovered the outstanding demand from the petitioner by attaching the bank account. The Order was challenged primarily on the ground that the petitioner was not provided a reasonable opportunity.

HELD

The Hon’ble Court held that when the entire tax liability has arisen on account of an inadvertent error committed while filing the GSTR 1 return which was subsequently rectified in GSTR-3B and GSTR-9 return and just because the petitioner did not submit the reply before the authorities in time, it is just and necessary to provide the petitioner opportunity. The Hon’ble Court therefore remanded the matter with a direction that amounts appropriated pursuant to the impugned order shall be subjected to the outcome of the remanded proceedings.

37 Maurya Industries vs. Union of India

(2024) 19 Centax 273 (Del.)

Dated 11th March, 2024

Cancellation of GST registration must be based on objective criteria, ensuring that registration can only be cancelled retrospectively when the consequences are intended and warranted.

FACTS

Petitioner applied for cancellation of its registration on 12th April, 2023 as the firm was discontinued due to losses incurred. It had also duly furnished the required documents. However, the application was rejected via a SCN dated 6th June, 2023, citing an inspection by the Anti-Evasion Branch on 30th May, 2023 that found the petitioner’s principal place of business non-existent. Subsequently, an order was issued in line with the Show Cause Notice, retrospectively cancelling the petitioner’s registration from 26th October, 2022. Being aggrieved by impugned order passed by respondent, petitioner preferred this petition before Hon’ble High Court.

HELD

The High Court held that retrospective cancellation is invalid as the petitioner had applied for cancellation before the inspection on the basis that business was discontinued thereby implying that his place of supply was not existing any more. According to section 29(2) of the CGST Act, a taxpayer’s registration can be cancelled with retrospective effect only where such consequences are intended and are warranted. In the present case, such cancellation would have unwanted repercussions such as invalidation of the ITC claimed by petitioner’s customers.

Further, such cancellation cannot be based on subjective assessment but must be based on objective criteria. Mere non-filling of returns cannot be the reason for retrospective cancellation of registration, as it also covers the period when the returns were filled. Accordingly, writ petition was disposed of, reserving all the rights and contentions of the parties.

38 Aditya Steel Trading vs. Joint Commissioner, Central Goods and Services Tax and Central Excise (2024) 19 Centax 469 (Bom.)

Dated 18th June, 2024

Show Cause Notice issued without attaching the impounded documents mentioned therein renders the petitioner unable to effectively respond to the SCN.

FACTS

Petitioner was issued a SCN dated 25th October, 2023, however copies of impounded documents along with the SCN were provided only on 25th December, 2023. This reduction in time lead to non-filing of reply by petitioner. Consequently, an order was issued on 28th December, 2023, supplemented by another order of 20th December, 2023. Being aggrieved by impugned order passed by respondent, petitioner preferred this petition.

HELD

The High Court held that impugned orders were passed without giving an opportunity to reply to SCN. It was observed that without access to copies of the impounded documents, the petitioner would have been unable to adequately address the SCN. Consequently, the impugned Order was deemed to be set aside, and the matter was remanded.

Recent Developments in GST

A. NOTIFICATIONS

i) The Government has published the GST Appellate Tribunal (Recruitment, Salary and Other Terms and Conditions of Service of Group “C” Employees) Rules, 2024, dated 21st June, 2024 by Notification No. G.S.R 340(E), dated 21st June, 2024.

B. CIRCULARS

The following circulars have been issued by CBIC.

i) Monetary Limit for filing appeals by Department — Circular no.207/01/2024-GST dated 26th June, 2024.

By the above circular, monetary limits are indicated for the filing of appeals by the department. Different limits are provided for appeals to different forums like GSTAT, High Courts and Supreme Court.

ii) Clarifications in respect of manufacturers of specified commodities — Circular no.208/02/2024-GST dated 26th June, 2024.

By the above circular, various issues regarding compliance with special procedures in respect of specified commodities like Pan Masala and tobacco products are clarified.

iii) Clarification regarding Place of Supply — Circular no.209/03/2024-GST dated 26th June, 2024.

In the above circular, clarification is given about the Place of Supply in case of supply to an unregistered person. It is clarified that if the delivery address is different from the billing address, then the delivery address should be considered as the place of supply.

iv) Clarification on the valuation of Import Services- Circular no. 210/04/2024-GST dated 26th June, 2024.

In case of import of services between related parties, the importer is liable to pay tax under RCM, even though there is no consideration. By the above circular, clarification is given about valuation in such cases.

v) Clarification regarding ITC of Tax paid under RCM— Circular no.211/05/2024-GST dated 26th June, 2024.

In case, there are any inward supplies, received from unregistered suppliers, on which the recipient is liable to pay tax under RCM, in the above circular it is clarified that the year for considering the time limit under section 16(4) for availing ITC should be the year in which the self-invoice is created for such supply.

vi) Clarification regarding deduction towards discount — Circular no.212/06/2024-GST dated 26th June, 2024.

As per section 15(3)(b)(ii), if any discount is given by the supplier to the recipient then such discount is deductible from the value of such supply. One of the conditions for getting the claim is that the recipient should reduce his ITC proportionately. However, at present there is no facility to know the reduction made by the recipient. The circular has provided that, in such cases, a self-declared undertaking can be obtained from the recipient about a reduction in ITC and if such reduction is more than 5 lakhs, then a certificate from CA/CMA should be obtained.

vii) Clarification regarding Taxability of Shares / Securities – Circular no.213/07/2024-GST dated 26th June, 2024.

By the above circular clarifications are given about the taxability of ESOP / ESPP / RSU (Issue of Shares/Securities) provided by the Company to its employees through its overseas holding Company. Mainly it is clarified that such transactions are related to Shares / Securities, which are neither goods nor services, hence not liable to tax under GST as import of services.

viii) Clarification about reversal of ITC in case of Life Insurance — Circular no.214/08/2024-GST dated 26th June, 2024.

When there is an exempt supply, the ITC is required to be reversed on a proportionate basis. In the above circular it is clarified that in respect of the amount of premium for taxable life insurance policies, which is not included in taxable value as determined under Rule 32(4), there is no need for reversal of pro rata ITC.

ix) Clarification regarding taxability of Salvage — Circular no.215/09/2024-GST dated 26th June, 2024.

In the case of the insurance claim for goods, there are pre-determined terms for the treatment of salvage while deciding the claim amount. In the above circular, clarifications are given about taxability and valuation of salvage/wreckage.

x) Clarification regarding GST liability and ITC in case of Warranty— Circular no.216/10/2024-GST dated 26th June, 2024.

In the above circular, various clarifications are given with respect to GST liability and availability of ITC in cases involving warranty / Extended Warranty. This is in continuation of earlier circular no.195/07/2023-GST- dated 17th July, 2023.

xi) Clarification regarding ITC to the Insurance Companies — Circular no.217/11/2024-GST dated 26th June, 2024.

By the above circular, clarifications are given about the entitlement of ITC by insurance companies on the expenses incurred for the repair of motor vehicles in case of reimbursement mode of insurance claim settlement.

xii) Clarification regarding Taxability of providing loan — Circular no.218/12/2024-GST dated 26th June, 2024.

In the above circular, clarifications are given about the taxability of transactions of providing a loan by an overseas affiliate to an Indian affiliate or by a related person.

xiii) Clarification about ITC on Ducts and Manholes — Circular no.219/13/2024-GST dated 26th June, 2024.

By the above circular, clarification is given about the applicability of Section 17(5)(d), i.e., regarding the blocking of ITC with respect of ducts and manholes used in the network of optical fibre cables (OFCs).

xiv) Clarification about the place of supply in case of Banks — Circular no.220/14/2024-GST dated 26th June, 2024.

By the above circular clarifications are given about the place of supply applicable for Custodial Services, provided by the bank to Foreign Portfolio Investors.

xv) Clarification regarding Time of supply in case of Construction services of Road — Circular no.221/15/2024-GST dated 26th June, 2024.

In the above circular, clarifications are given about Time of supply in relation to the supply of services of construction of road and maintenance thereof of National Highways of the National Highways Authority of India under a Hybrid Annuity Mode.

xvi) Clarification about Time of supply in case of Spectrum Uses — Circular no.222/16/2024-GST dated 26th June, 2024.

By the above circular, clarifications are given about the time of supply of services Spectrum uses and other similar services.

C. ADVANCE RULINGS

19 GST on EPC/Turnkey Contract vis-à-vis Imported goods

M/s. Tecnimont Private Limited (AR Order No.GUJ/GAAR/R/2024/02 (In Application No.Advance Ruiling/SGST& CGST/2023/AR/15) dt. 5th January, 2024 (Guj)

The applicant M/s Tecnimont Private Limited has entered into a turnkey contract with Indian Oil Corporation Ltd. (for short — IOCL), vide contract No. 44AC9100-EPCC-1 dated 19th January, 2021, for executing EPC work of Acrylic Acid Unit (90 KTA) and Butyl Acrylate Unit (150 KTA) of Acrylic/Oxo-Alcohol Project’, located at IOCL Dumad Complex, Nr. Gujarat Refinery, Vadodara.

The applicant has stated that, in terms of the contract, all imported materials required to be supplied under the contract will be sold by the applicant to IOCL on High Seas Sale [HSS] basis by endorsing bill of lading in favour of IOCL who will be filing the bill of entry for warehousing and subsequently for home consumption by paying the applicable customs duty and IGST.

The applicant has further clarified that the contract value is fixed as a lump sum price of ₹18,72,00,48,047.50 comprising of:

“(i) ₹14,70,30,56,131 for domestically sourced material and supply of service;

(ii) Foreign Exchange Euros of € 4.55.18,322 (i.e., converted @ 1 EURO = INR88.25 as on the date of opening of price bid ₹401,69,91,916.5) based on the terms and conditions of Contract No. 44AC9100-EPCC-1 towards goods imported outside India;

(iii) ₹32,89,75,280.89 towards custom Duty & SWS on Foreign Component imported which is reimbursable according to contractual terms.”

As per the applicant, during the course of importation, before the goods reached the Customs frontiers of India, they entered into an HSS agreement with IOCL, transferring the ownership of the goods to IOCL at the price agreed in the contract. The applicant raises a Custom Invoice with respect to goods sold to IOCL under HSS without charging GST. IOCL then files a bill of entry as an importer of the said goods and discharges customs duty and IGST by clearing the goods for warehousing or home consumption. The applicant intends to treat this portion of the supply of imported goods as a separate supply of goods distinct from the works contract supplies.

In other words, the applicant wanted to say that the contract No. 44AC9100-EPCC-1 entered into with IOCL, identifies two separate sets of supplies for the turnkey project, (i) works contract for EPC work and [ii] supply of imported materials for the said work.

With respect to consideration mentioned in respect of contract part at (i) above, the applicant intends to charge GST @ 18 per cent, as works contract service.

In respect of part (ii), the applicant intends to claim exemption from the levy of tax in terms of para 8(b) of Schedule-III of CGST Act,2017;

As per above entry 8(b) in Schedule-III, the sale by transfer of documents of title to goods before goods are cleared for home consumption is exempt.

With the above background, the applicant has put forth the following questions before the ld. AAR for its ruling:

“1. Whether the transaction of sale of goods by Tecnimont Pvt. Ltd. (TCMPL) to Indian Oil Corporation Ltd. (IOCL) on a High Seas Sale basis in terms of Contract No. 44AC9100-EPCC-1 would be covered under Entry No. 8(b) of Schedule III of the CGST Act and shall be excluded from the value of work contract service for charging GST?

2. Whether the transaction of sale of goods on a high seas sale basis by the Applicant to IOCL in terms of Contract No. 44AC9100-EPCC-1 would be treated as a works contract and whether Applicant is liable to charge GST on the goods sold on a high seas sale basis to IOCL? If yes, what will be the applicable rate of tax on such goods supplied?”

The ld. AAR went through the agreement and minutes recorded in follow-up to the award of the contract. The ld. AAR referred to various clauses in the agreement and observed about scope of important features of the contract as under:

“18. The contract in question is in respect of a turnkey EPC contract. The terms ‘Turnkey’ and ‘EPC contract’ are not defined under the CGST Act. Now, what constitutes an EPC contract? We find that an Engineering, Procurement and Construction (‘EPC’) contract is a particular form of contracting arrangement wherein the EPC contractor is made responsible for all the activities right from design, procurement, construction, commissioning, and thereafter handover of the project to the end-user or owner. Likewise, Turnkey contracts, place the responsibility for designing, engineering, procurement, and construction of the entire project on a single contractor. Such contracts further ensure that following completion, the client receives a ready-to-use facility. Further, these contracts are usually ‘fixed price’ contracts.”

The ld. AAR noted that in contrast to the above features of the contract, the applicant has submitted that there are two separate contracts within the EPC contract i.e.,

“[i] supply of imported materials for the project; and

[ii] works contract for EPC work pertaining to EPCC-1 project.”

In this respect, the ld. AAR referring to the definition of ‘works contract’ given in section 2(119) analyzed the aspects of said definition as under:

  • “works contract must be in relation to any immovable property;
  • composite supply undertaken on goods say fabrication or paint job would perse not fall within the ambit of works contract under GST; such contract would continue to remain composite supplies;
  • In terms of Schedule-II, para 6(a), works contract shall be treated as a supply of services;
  • GST aims to put at rest the controversy by defining what will constitute a works contract (applicable for immovable property only) by stating that a works contract will constitute a supply of service and specifying a uniform rate of tax applicable on the same value across India.”

The ld. AAR referred to important judgment about the implication of transactions being works contract-like, judgment in the case of Kone Kone Elevator India Private Limited [2014 (304) E.L.T. 161 (S.C.) — 2014-VIL-12-SC-CB] and other judgments.

Based on the ratio of the above judgments the ld. AAR observed that the contract dated 19th January, 2021, entered into by the applicant & IOCL, is to execute the work of “EPCC-1 Package for Acrylic Acid & Butyl Acrylate Unit of Acrylic/ Oxo-Alcohol Project” which is a lump sum turnkey EPC contract. The ld. AAR observed that to divide a turnkey EPC contract into two parts is legally not tenable. It is tenable if they have entered into two different contracts.

In respect of HSS sales of imported goods to IOCL, the ld. AAR held that the sale is covered by entry 8(b) of Schedule III and hence not liable to GST.

However, in respect of the liability of the applicant, the ld. AAR refers to provisions of section 15 of the GST Act which provides for the valuation of Taxable Supply.

The ld. AAR, amongst others, referred to section 15(2)(b) which reads as under:

“(b) any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both;”

The ld. AAR observed that in terms of the contract, the applicant is liable to provide the goods [supplied on an HSS basis] and hence the submission that this value is not to be included in the transaction value in respect of the works contract service is legally not tenable. The ld. AAR observed that, in terms of section 15, the value of such imported goods would form a part of the transaction value for payment of GST in the hands of the applicant.

In this respect the ld. AAR made reference to the Judgment decided by the Hon’ble Chhattisgarh High Court in the case of M/s. Shree Jeet Transport [Writ Petition (T) No. 117/2022 decided on 17th October, 2023] – 2023-VIL-764-CHG.

In this case, the diesel supplied free by contractee to the contractor providing transport services is held liable to tax in the hands of the contractor.

Applying said principle, the ld. AAR held that the value of imported goods is to be included in taxable contract value.

Based on the above analysis the ld. AAR gave the ruling as under:

“1. The transaction of sale of goods by Tecnimont Pvt. Ltd. (TCMPL) to Indian Oil Corporation Ltd. (IOCL) on a High Seas Sale [HSS] basis in terms of Contract No.44AC9100-EPCC-1 is covered under Entry 8(b) of Schedule III of the CGST Act. However, in terms of the findings recorded supra, the value of such HSS supply would form a part of the transaction value under section 15, ibid, for computing the value of work contract service for charging GST.

2. The transaction of sale of goods on a high seas sale [HSS] basis by the applicant to IOCL in terms of Contract No. 44AC9100-EPCC-1 as has been held supra, is covered under entry 8(b) of Schedule III of the CGST Act, 2017 and is therefore the HSS supply is neither a supply of goods nor a supply of services.”

20 ITC vis-à-vis Solar Plant for Captive Consumption

Unique Welding Products P. Ltd. (AR Order No.GUJ/GAAR/R/2024/01 (in application no. Advance Ruling/SGST & CGST/2023/AR/14) dt. 5th January, 2024 (Guj)

The applicant, M/s Unique Welding Products Pvt. Ltd., is engaged in the business of manufacturing and sale of welding wires and it is registered with the GST department.

The applicant supplies its products i.e., Welding Wires etc. after discharging GST @ 18 per cent. The applicant has entered into an interconnection agreement with power distribution licensee (Madhya Gujarat Vij Company Ltd) for captive use of power generated by Roof Top Solar System and has installed a rooftop solar system with a capacity of 440 KW (AC) on the factory roof for power generation. The applicant generates power solely and captively for use in its manufacturing activity of welding wires within the same premises.

The applicant further submitted that their business of manufacturing and sale of welding wires from their manufacturing plant constitutes as ‘business’ as per section 2(17) of the CGST Act, 2017 and is eligible for ITC as per section 16(1).

In light of the above background, the applicant has sought an advance ruling on the below-mentioned questions:

“1. Whether the applicant is eligible to take ITC as ‘inputs/capital goods’ or ‘input services’ on the purchased rooftop solar system with installation & commissioning in terms of sections 16 & 17 of the CGST/GGST/IGST Act?

2. Whether the rooftop solar system with installation and commissioning constitutes plant and machinery of the applicant which are used in the business of manufacturing welding wires and hence not blocked input tax credit under section 17(5) of the CGST/GGST/ IGST Act?”

In the course of the hearing, the applicant provided a copy of the Ruling in the case of M/s. The Varachha Co.op Bank Ltd., Surat.

Copy of the Annual report of the applicant for the FY 2022–23, showing addition to Plant and machinery under fixed assets, copy of the invoice from rooftop solar plant and copy of interconnection agreement signed with MGVCL for rooftop solar plant were filed before the Ld. AAR.

The applicant further clarified that the solar rooftop plant is bolted to the factory roof by means of screws and bolts for operational efficiency and safety. Further, it was clarified that the rooftop solar plant can be dismantled and sold if required. Accordingly, it was submitted that, the rooftop solar plant is not permanently fastened to the building hence it will not be an immovable property. It was further submitted that the rooftop solar plant qualifies as a plant and machinery used for the furtherance of the business of supplying taxable goods and hence not covered under blocked credit mentioned in section 17(5)(d) of the CGST Act, 2017.

The ld. AAR referred to relevant provisions like a definition of business, the scope of ITC as per section 16 and blocked credit u/s.17(5) of the CGST Act.

The ld. AAR also referred to the later issued by Additional Chief Engineer (RA&C), Madhya Gujarat Vij Company Limited, Vadodara addressed to Superintending Engineer, Circle Office, MGVCL, granting approval to the applicant, for grid connectivity of Solar Roof Top Photo-Voltaic systems as per the provisions of the Gujarat Solar Power Policy-2021. The relevant paras are reproduced in the AR as under:

“With reference to the above subject, it is to state that application of M/s. Unique Welding Products P Ltd for the installation of a 440.00 KW(AC) Solar Roof Top Photo Voltaic System has been registered by GEDA.

Now regarding the connectivity with MGVCL network for injection of Solar Energy from 440.00 KW Solar Power Plant, consumer M/s. Unique Welding Products P Ltd hearing consumer no. 15453 has paid connectivity charges of ₹50000 and executed a connectivity agreement with MGVCL.

The connectivity has been granted for a period of 25 years. Accordingly, the connectivity agreement has been executed for 25 years and it shall be in force for the period of 25 years only.

Copy of the connectivity agreement, connectivity charge paid receipt, CEI approved single line diagram, earthing diagram, wiring diagram and installation charging approval received from CEI is attached herewith.”

Based on the above documents and legal provisions, the ld. AAR observed as under:

“17. It is therefore, clear that the roof solar plant, affixed on the roof or the building is not embedded to earth. Accordingly, it is not an immovable property but a plant and machinery, which is utilized to generate electricity which is further solely and captively used in the manufacture of welding wires. The applicant is engaged in the business of supply of welding wires on payment of GST at the applicable rates. The applicant has further stated that they have capitalized the roof solar plant in their books of accounts. The Roof Solar Plant, as is evident is not permanently fastened to the building. Thus, it qualifies as a plant and machinery and is not an immovable property, hence, it is not covered under blocked credit as mentioned in 17(5)(d) of the CGST Act, 2017. Therefore, we hold that the applicant is eligible for input tax on roof solar plant.”

With the above background the ld. AAR gave a ruling on pertinent questions as under:

“1. The applicant is eligible to avail of ITC rooftop solar system with installation & commissioning under the CGST/GGST Act.

2. The rooftop solar system with installation and commissioning constitutes as plant and machinery of the applicant and hence is not blocked ITC under section 17(5) of the CGST/GGST Act.”

21 Catering Services to Education Institution

M/s. Sri Annapurneshwari Enterprises (AR Order No.KAR ADRG 04/2023 dt. 23rd January, 2023 (Kar)

The applicant, M/s. Sri Annapumeshwari Enterprises is a Partnership firm registered under GST. The applicant is engaged in the business of hotel and catering services.

The applicant has sought an advance ruling in respect of the following question:

“i. Whether providing catering services to Educational Institutions from 1st standard to 2nd of Pre University Course (PUC) is taxable or not according to Notification No. 12/2017- Central Tax Rate –under Heading 9992.”

The applicant has stated that they are carrying on the business of the hotel and they are supplying ready-to-eat breakfast, and lunch to the KLE Independent Pre University (PU) College, Bengaluru. They are not collecting any charges from the students. They are billing to college and college is paying the amount.

In this respect the ld. AAR noted that the applicant is providing catering services to Educational Institutions from 1st Standard to 2nd PUC and referred to entry No.66 of Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017 as amended vide Notification No.02/2018-Central Tax (Rate) dated 25th January, 2018 and reproduced the same as under:

“Sl. No. Chapter, Section, Heading, Group or Service Code (Tariff) Description of Services Rate (per cent.) Condition
66 Heading 9992 Services provided –

(a) by an educational institution to its students, faculty and staff;

 Nil Nil
(aa) by an educational institution by way of conduct of entrance examination against
consideration in the form of entrance fee
(b) to an educational institution, by way of,-
(i) transportation of students, faculty and staff;
(ii) catering, including any mid-day meals scheme sponsored by the Central Government, State Government or Union territory;
(iii) security or cleaning or housekeeping services performed in such educational institution;
(iv) services relating to admission to, or conduct of examination by, such institution;
(v) supply of online educational

journals or periodicals:

Provided that nothing contained in sub-items (i), (ii) and (iii) of item
(b) shall apply to an educational institution other than an institution providing services by way of preschool education and education up to higher secondary school or equivalent.”

The ld. AAR observed that the services provided by way of catering to an educational institution, which is providing services by way of pre-school education and education up to higher secondary school are exempted from GST.

The ld. AAR also referred to the meaning of recipient of service as defined in section 2(93) and further observed that the concerned education institution is the recipient and it also fulfils the condition of being an Education Institution as defined in clause (v) of para 2 of the Notification no.12/2017-Central Tax (Rate) dated 28th June, 2017.

The ld. AAR arrived at the conclusion that since the applicant is providing ready-to-eat food by way of catering to a Pre-University College, the services provided by the applicant under question are covered under entry No.66 of Notification No. 12/2017-Central Tax (Rate) dated: 28.06.2017 as amended further and hence exempted from GST.

The ld. AAR issued a ruling accordingly.

22 Unit Run Canteen — Tax Position

M/s. Central Police Canteen (AR Order No. KAR ADRG 35/2023 dt. 16th November, 2023 (Kar)

The applicant is a subsidiary canteen of the Central Police Force Canteen System (CPFCS/CPF Canteen System), which is set up vide letter No.27011/75/2011-R&W dated 18th November, 2011, issued by the Resettlement & Welfare Department, Police Division-II, Ministry of Home Affairs, Government of India. They have claimed that they are entitled to avail of CPF Canteen facilities.

The applicant has quoted the Notification No.7/2017-Central Tax (Rate) dated 28th June, 2017, contending that their canteen is covered under “Unit Run Canteens” and thus the supply of goods by them to the authorized customers is exempted from levy of GST.

The applicant also contemplated that they are entitled to claim a refund of fifty per cent of the applicable central tax paid by it on all inward supplies, under notification no. 06 of 2017— Central Tax (R) dated 28th June, 2017

Applicant has put the following questions for the ruling of AAR.

“a. Whether the applicant being a recognized Unit Run Canteen be exempted from levying CGST on goods sold by it to authorized customers?

b. Whether similar exemption can be availed under State GST also?

c. Is the applicant eligible to claim a refund of CGST and SGST paid by it on goods purchased to date?”

The ld. AAR considered each question. In respect of the first question about exemption from the levy of CGST on goods sold by it to authorized customers, the learned AAR referred to Notification No. 07/2017-Central Tax (Rate) dated 28th June, 2017. Said Notification contemplates to grant exemption as under:

“Sl. No. Tariff item, sub-heading,

heading or Chapter

 Description of Services of Goods
(1) (2) (3)
1. Any Chapter The supply of goods by the CSD to the Unit Run Canteens
2. Any Chapter The supply of goods by the CSD to the authorized customers.
3. Any Chapter The supply of goods by the Unit Run Canteens to the authorized customers.”

The heading CTH 8711 and 8713, are described as under The ld. AAR observed that CSD i.e., Canteen Stores Department, Unit Run Canteens of the CSD and the authorized customers of CSD mentioned in the above notification are under the Ministry of Defence, Government of India. Applicant is a subsidiary canteen of the Central Police Force Canteen System (CPFCS), under the Ministry of Home Affairs, Government of India, formed in terms of permission granted vide letter No. DAVII/ SC-CP/2013 dated 28th November, 2013.

Therefore, the ld. AAR held that the applicant is not covered under the Unit Run Canteen as they are a subsidiary canteen of CPF canteen under the Ministry of Home Affairs. Accordingly, the ld. AAR held that the applicant is not entitled to claim the exemption provided under Notification No.7/2017-Central Tax (Rate) dated 28th June, 2017.

In respect of the second question, exemption under SGST, the ld. AAR held that, like CGST, no exemption is eligible under SGST.

Regarding, the third question about a refund, the ld. AAR referred to Notification No. 6/2017-Central Tax (Rate) dated 28th June, 2017, which reads as under:

“In exercise of the powers conferred by section 55 of the Central Goods and Services Tax Act, 2017 (12 of 2017), the Central Government, on the recommendations of the Council, hereby specifies the Canteen Stores Department (hereinafter referred to as the CSD), under the Ministry of Defence, as a person who shall be entitled to claim a refund of fifty per cent, of the applicable central tax paid by it on all inward supplies of goods received by it for the purposes of subsequent supply of such goods to the Unit Run Canteens of the CSD or to the authorized customers of the CSD.

2. This notification shall come into force with effect from the 1st day of July, 2017.”

Since the above notification covers CSD under the Ministry of Defence, as a person who shall be entitled to claim a refund, the ld. AAR held that the applicant cannot be covered by the above notification as it is not under the Defence Ministry but under the Home Ministry.

Thus, all questions are answered in negative.

23 Scope of Article 243G and 243W vis-à-vis Exemption.

M/s. Sanjeevini Enterprises (AR Order No.KAR ADRG 03/2023 dt. 23rd January, 2023 (Kar)

The applicant has sought an advance ruling in respect of the following questions:

“i. Whether works contract service provided to Bio Centers, Department of Horticulture and Center of Excellence are exempted as per GST Exemptions?

ii. Whether other services like data entry operator and security, provided to the Horticulture Department attract GST?

iii. Whether materials like fertilizers, soil, and sand supplied for use of bio centres exempted as per GST?”

The applicant has stated that they are bidding for a tender called by the Department of Horticulture which includes the supply of manpower for Bio-Centre, Department of Horticulture, Centre of Excellence for Floriculture, Tunga Horticulture Farm, Shivamogga, which includes the following works:

1) Department of Horticulture: Handling the complete process of tissue culture production of various agriculture plants and mushroom research, growing under the guidance of the agriculture officer including cleaning and maintenance of equipment used for production under the tissue culture process.

2) Center for Excellence, Tunga Floriculture Center: Handling the complete process of research on flowers, planting and growing process and maintenance under the guidance of the agriculture officer including cleaning and maintenance of equipment used and handling of wastage.

The ld. AAR referred to entry no.3 of the Notification No.12/2017-Central Tax (Rate) dated 28th June, 2017 which reads as under:

“Pure Services (excluding works contract service or other composite supplies involving any goods) provided to the Central Government, State Government or Union territory or local authority by way of any activity in relation to any function entrusted to a Panchayat under article 243G of the Constitution or in relation to any function entrusted to a Municipality under article 243W of the Constitution.”

The ld. AAR observed that the applicant has to satisfy two conditions:

“1. Pure Services (excluding works contract service or other composite supplies involving any goods) provided to the Central Government, State Government or Union territory or local authority

2. by way of any activity in relation to any function entrusted to a Panchayat under article 243G of the Constitution or in relation to any function entrusted to a Municipality under article 243W of the Constitution.”

The ld. AAR observed that the first condition of supplying pure services to the Karnataka Government is satisfied.

The ld. AAR refers to functions listed under Articles 243G and 243W. The ld. AAR found that the activity of the applicant is not directly covered by any entry in the above articles. The ld. AAR examined whether it can fall under the entry for Agriculture.

The ld. AAR held that the issue certainly cannot amount to agriculture and there is no other direct entry to cover the above activity in Article 243G/243W.

The ld. AAR answers negative as under:

“i. Works contract service provided to Bio Centers, Department of Horticulture and Center of Excellence are not exempted from GST.

ii. Providing Manpower services like data entry operator, and security to the Horticulture Department is exigible to GST at 18 per cent (CGST @ 9 per cent and KGST @ 9 per cent).

iii. Materials like fertilizers, soil and sand supplied for use of bio centres are not exempted under GST.”

Goods and Services Tax

HIGH COURT

23 Kalpana Cables Products Pvt. Ltd. vs.

Commissioner, Department of Trade and Taxes

(2024) 18 Centax 485 (Del.)

Dated 22nd April, 2024

Cancellation of registration cannot be done retrospectively by the department without providing any specific and justifiable reasons.

FACTS

Petitioner was a registered person engaged in the business of manufacturing PVC copper wires under GST law. Petitioner applied for cancellation of GST registration on 21st May, 2019, due to closure of business following director’s ill health. The respondent issued an order dated 5th June, 2020, rejecting the cancellation application without providing any reasons. Additionally, a show cause notice was issued on 1st September, 2020, stating that the taxpayer had not filed returns for a continuous period of six months. The petitioner was asked to appear for a personal hearing without specifying the date, time and reason. As a result, the petitioner could not represent itself before the respondent. Subsequently, an ex-parte order was passed, cancelling the GST registration retrospectively, with effect from 1st July, 2017 without assigning any reasons whatsoever. Aggrieved by this order, the petitioner filed a writ petition before the Hon’ble High Court.

HELD

Hon’ble High Court observed that petitioner’s GST registration was not liable to be cancelled retrospectively as there were no material facts on record justifying such action. The Hon’ble Court further held that discretion to cancel registration retrospectively must be exercised objectively and not arbitrarily. Accordingly, the Court directed that cancellation of GST registration would be effective from the date mentioned in the petitioner’s application. Thus, the impugned order was set aside, and writ petition was disposed of.

24 B. Kusuma Poonacha vs. Senior Intelligence Officer

(2024) 19 Centax 6 (Kar.)

Dated 20th February, 2024

Cash cannot be seized by Revenue during search operations as it does not fall under “goods” or “things” as envisaged under section 67(2) of CGST Act, 2017.

FACTS

The Petitioner was an employee of M/s. Vihaan Direct Selling (India) Pvt. Ltd. The respondent searched residential premises of the petitioner and seized various goods along with cash amounting to ₹1,71,07,500. Additionally, the petitioner’s statement was recorded. However, following the seizure of goods and cash and the recording of the statement, no SCN was issued by the respondent and more than a year and a half has since elapsed. Aggrieved by the seizure of goods and cash, the petitioner filed a writ before this Hon’ble High Court.

HELD

Relying on various judgments, the Hon’ble High Court held that the term “things” mentioned under section 67(2) of CGST Act does not include cash / currency / money. Therefore, it cannot be seized during search and seizure, in terms of the aforesaid provision. Additionally, it was also held that seizure of documents or books or things is only for the purpose of inquiry or any proceedings under the Act and cannot be used to tax the seized goods. Lastly, as per section 67(7) of CGST Act, 2017, the respondent does not have the right to retain the subject cash for beyond six months. However, in the given case, more than one year has elapsed. Therefore, High Court quashed the impugned seizure order and directed the respondent to return the entire cash together with accrued interest.

25 Vela Agencies vs. Assistant Commissioner,

State Tax

(2024) 19 Centax 35 (Mad.)

Dated 26th April, 2024

An Order creating a demand cannot be issued based on a subject matter if no allegations regarding it were raised in SCN.

FACTS

The Petitioner discontinued its business operations as an Aircel distributor following the closure of Aircel Ltd. on
29th December, 2022. An SCN was issued to the petitioner, demanding ₹8,27,252, for alleged under reporting of sales in comparison to ITC availed. Subsequently, an impugned order was passed, creating a liability amounting to ₹14,97,702 along with an equivalent penalty. The additional demand of ₹6,69,820 was based on a comparison between GSTR 3B and GSTR 2A, which was not included in SCN. Aggrieved by the impugned order, the petitioner filed an appeal before the High Court.

HELD

The Hon’ble High Court observed that there must be consistency between the grounds raised in SCN and its corresponding Order passed subsequently. Since impugned Order was passed on a ground different from that raised in SCN, the Court set aside the impugned order. The writ petition was disposed of, granting the respondent liberty to initiate fresh proceedings.

26 Laxmi Construction vs. State Tax Officer,

CT & GST

(2024) 18 Centax 490 (Ori.)

Dated 9th May, 2024

Notice uploaded electronically via GST portal is a valid mode of service even though the notice was not physically served to the noticee.

FACTS

The petitioner was engaged in the business of works contract. On 1st October, 2021, the petitioner was issued an SCN alleging that the petitioner had rendered works contract service; however, the same was not reported in its GSTR 3B returns. Subsequently, an order was passed electronically and uploaded on the common portal on 7th December, 2021, confirming the demand. However, this order was not physically served to the petitioner. The time limit to file an appeal had already expired when the petitioner became aware of such an order and filed a writ before Hon’ble High Court.

HELD

Hon’ble High Court held that the order uploaded electronically was sufficient and a valid mode of service, and it was not mandatory for the respondent to serve it physically. Accordingly, the writ petition was dismissed.

27 Universal Relocations India Pvt. Ltd. vs.

State Of Tamil Nadu

2024 (19) Centax 43 (Mad.)

Dated 26th March, 2024

GST cannot be demanded mechanically on figures of trade payables and employee benefit expenses mentioned in financial statements.

FACTS

The petitioner was engaged in the business of relocation service. An SCN was issued raising a demand regarding trade payables and employee benefit expenses, based on the petitioner’s balance sheet. However, the petitioner contended that he did not receive any SCN and was not offered a personal hearing. Despite this, an impugned order was passed, confirming the demand. Aggrieved by the impugned order, the petitioner filed this petition before the Hon’ble High Court.

HELD

High Court held that there is a lack of clarity regarding the basis for imposing GST on total trade payables, where the turnover was taken directly from the balance sheet of the petitioner. Similarly, the basis for levying GST on employee benefit expenses, based on amounts from the petitioner’s profit and loss account, was not established. Accordingly, the impugned order was quashed, and the matter was remanded for reconsideration.

28 Mahesh Devchand Gala vs. Union of India

(2024) 18 Centax 525 (Bom.)

Dated 10th May, 2024

The detention of the petitioner on behalf of his company cannot extend overnight or beyond 24 hours under the pretext of recording a statement, especially considering the petitioner’s cooperation during the investigation and the complete discharge of the entire GST liability.

FACTS

In October 2021, a thorough fraud investigation was carried out against the petitioner, followed by several summons. During one of these instances, the petitioner was summoned to visit the respondent’s office where he was detained overnight and arrested by the police the next day. Later, he was presented before the magistrate. The petitioner contended that such an allegation was illegal and was delayed for 13 hours, without providing any reason. Aggrieved by the prolonged and unnecessary arrest, the present petition has been filed.

HELD

The High Court held that the investigation was conducted in 2021 and since then, the petitioner had cooperated with the authorities. Despite this cooperation, he was detained without any substantial reason for more than 24 hours. Additionally, the entire liability was discharged by the company.

The Court criticised the practice of detaining individuals overnight under the guise of recording of their statements, regardless of their willingness to co-operate. Relying on the case of Arnab Manoranjan Goswami vs. State of Maharashtra (2021) 2 SCC 427, the Court underscored the need for judicial scrutiny where the State potentially misuses criminal law. Accordingly, interim bail was granted, and the petition was disposed of.

29 M. Trade Links vs. Union of India

[2024] 163 taxmann.com 218 (Kerala)

Dated 4th June, 2024.

The Hon’ble High Court dismissed the challenge to the constitutional validity of section 16(2)(c) and section 16(4) of the CGST Act. The Court ruled that for the purpose of section 16(4), the deadline for filing GSTR 3B return for month of September is deemed to be 30th November of each financial year, retrospectively effective from 1st July, 2017. Thus, assessees who filed their returns for September on / or before 30th November will have their ITC claims considered as availed within the specified time limit under section 16(4), provided they are otherwise eligible for ITC.

FACTS

The petitioners challenged Sections 16(2)(c) and 16(4) of the Central Goods and Services Tax Act and State Goods and Services Act, 2017. The provisions were challenged inter alia on the following grounds:

(a) The recipient dealer cannot be burdened to ensure that the supplier of goods and services has paid the tax. Such a condition would be absolutely impossible for the recipient dealer to comply with. Further, the recipient dealer has no means to force the supplier to make the payment and therefore, the doctrine of impossibility would be applicable in such a situation.

(b) Where the revenue is able to recover the tax along with interest and penalty from the supplier dealer and also denied the claim of the input tax credit as the said tax would not get reflected in GSTR-2A, this situation would lead to unjust enrichment of the Government as on the same taxable transaction, the Government would collect tax from the recipient dealer and also from the supplier along with interest and penalty, as there is no provision for refunding the amount collected from the recipient in cases where the department successfully recovers the unpaid tax from the supplier who had defaulted.

(c) Section 16(2)(c) confers unchecked powers on the respondent authorities, to treat bona fide and genuine purchaser dealers and guilty purchasers alike.

(d) The claim of ITC is a right of the recipient dealer and not a concession given by the taxing authorities under the statute. The input tax credit under the GST Act is the property of the recipient dealer, and denying the credit for default of the supplier dealer would be violative of Article 300 of the Constitution.

HELD

The Hon’ble High Court held as under:

(i) The recipient dealer’s claim for ITC is in the nature of concession or entitlement. It is not an absolute right and is subject to the conditions and restrictions as per the scheme of the GST legislation. Hence, there is no substance in the submissions that section 16(1) of the GST Act provides an absolute right to claim Input Tax Credit and conditions in sub-section (2) of section 16 cannot take away the right conferred thereunder. Section 16(2) is the restriction on eligibility and section 16(4) is the restriction on the time for availing ITC.

(ii) The Scheme of the Act provides that only tax collected and paid to the Government could be given as input tax credit. Hence, permitting ITC without payment of tax would render the GST laws and schemes unworkable. The condition imposed by section 16(2)(c) is therefore neither unconstitutional nor onerous on the taxpayer. In order to claim ITC, each registered person has a reason and incentive to request documentation and tax payment compliance from the person behind him in the value-added tax chain to ensure that the ITC chain is not broken.

(iii) Section 16(1) is subject to section 49 and section 16(2)(c) is subject to section 41. Eligible ITC is self-assessed in the GSTR 3B return, and only then it is credited to the electronic credit ledger, which can be utilised for payment of tax.

(iv) Prior to the amendment to section 39, by the Finance Act 2022, the date for furnishing the return under section 39 was 30th September. Considering the difficulties in the initial stage of the implementation of the GST regime, its understanding, and compliance, the Legislature effected the amendment and extended the time for filing the return for September to 30th November in each succeeding Financial Year. The amendment is only procedural to ease the difficulties initially faced by the dealers / taxpayers. Therefore, where for the period from 1st July, 2017 till 30th November, 2022, if a dealer has filed the return after 30th September and the claim for ITC was made before 30th November, such ITC claim should also be processed if he is otherwise entitled to claim the ITC.

30 Annalakshmi Stores vs. Deputy State Tax Officer

[2024] 163 taxmann.com 469 (Madras)

Dated 10th June, 2024.

When the show cause notice was served on a temporary ID created by the department, treating the petitioner as unregistered person while carrying out proceedings under section 63 of the CGST Act and the assessment order was passed ex-parte, on a best judgment basis, the Hon’ble Court set aside the matter for reconsideration on payment of 10 per cent of disputed tax demand.

FACTS

The GST registration of the petitioner was cancelled on 8th February, 2019 with retrospective effect from

31st August, 2017, on the grounds that the petitioner had not filed his returns continuously for a period of six months. Thereafter, the assessment was completed under section 63 of the CGST Act. The petitioner submitted that the show cause notice in Form ASMT-14 was mandatory and that he was unaware of the issuance thereof as the said documents were uploaded by creating a temporary ID.

HELD

The Hon’ble Court observed that tax liability was computed on a best-judgment basis by drawing on the particulars available in the auto-populated GSTR-2A. By using the total purchase value as the basis, the taxable value was arrived at and freight and miscellaneous charges and gross profit were added thereon. This exercise was carried out without hearing the petitioner in person and without considering the petitioner’s objections. Hence, the impugned orders are set aside subject to the petitioner remitting 10 per cent of the disputed tax demand in respect of each assessment period permitting the petitioner to file a reply to tax proposals in the show cause notice on merits and provide personal hearing in the said matter.

31 Rahul Bansal vs. Assistant Commissioner of State Tax

[2024] 163 taxmann.com 32 (Calcutta)

Dated 15th May, 2024.

Where the petitioner filed an appeal in time; however, due to technical glitches, it was rejected as deficient, and on resubmission, it was rejected on the grounds of limitation as being filed beyond the prescribed period mentioned in section 107 of the CGST Act, the Hon’ble Court held that statutory right to challenge the order passed under section 129 (3) of the said Act cannot be defeated by reason of technical glitches and directed to restore the appeal.

FACTS

The petitioner challenged orders passed by the first Appellate Authority under section 107 of the CGST Act, rejecting the appeals filed by the petitioner on the grounds of limitation. Petitioner’s goods were detained and seized and a penalty order was passed in terms of section 129(3) of the CGST Act. The petitioner got the goods released upon payment of penalty and also filed an appeal against the said order, but the said appeal was rejected on the grounds that no amount of disputed tax / interest / penalty is mentioned in form GST APL-01. According to the petitioner, by reasons of a technical glitch, the petitioner could not insert the disputed amount in the “disputed tax” column which ultimately resulted in the auto-generated rejection of the appeal, by the issuance of form GST APL- 02. The petitioner filed another appeal by incorporating the disputed amount, but on this occasion, since the appeal was filed beyond the prescribed period of limitation for filing of the appeal, the said appeal was rejected. The petitioner submitted that having paid the amount of penalty, he could not have been called upon by the appellate authority to make payment of any pre-deposit.

HELD

The Hon’ble Court observed that although the petitioner’s appeal was filed within time, by reasons of technical glitches, the same was rejected. It held that the petitioner’s statutory right to challenge the order passed under section 129(3) of the said Act cannot be defeated by reason of technical glitches and restored the appeal.

32 Shree Sai Hanuman Smelters (P.) Ltd vs. Senior

Intelligence Officer, Directorate General

of Goods and Service Tax

[2024] 163 taxmann.com 436 (Madras)

Dated 3rd June, 2024

Where a person registered with State GST authorities received a summon from the Central GST authority, the Hon’ble Court held that a writ of mandamus cannot be issued to restrain the performance of a statutory duty, especially in the instant case, where it was not possible to ascertain whether the summon was issued in connection with the inquiry of the petitioner or third party.

FACTS

The petitioner received a summon under section 70 of the Central Goods and Services Tax Act, 2017 from the Senior Intelligence Officer of the CGST department, which was addressed to its Accountant. The petitioner challenged the said summon on the ground that the petitioner’s assessment has been allotted to the State GST authorities and hence, the impugned summon is invalid. The department contended that the summons is in relation to proceedings initiated against M/s. GBR.

HELD

The Hon’ble Court noted that at this juncture, it is not clear as to whether the summon relates to proceedings against M/s. GBR or Shree Sai Hanuman Smelters Private Limited. It held that section 70 of the CGST Act empowers an officer to summon any person whose attendance is necessary in relation to the relevant enquiry and thus a mandamus cannot be issued to restrain the performance of a statutory duty.

Recent Developments in GST

A. GSTN INFORMATION 

i) The Government has issued information dated 16th May, 2024, whereby the availability of a facility to register machines for Pan Masala and Tobacco is informed (GST SRM-1). Further, information in the above respect is given vide information dated 7th June, 2024, for making available the facility of Form GST SRM-2 for reporting the details of inputs and outputs procured and consumed for the relevant month.

ii) The CBIC has issued Instruction No.1/2024-GST dated 30th May, 2024 whereby guidelines for initiation of recovery proceedings (in exceptional cases), before three months from the date of service of demand order, are given.

iii) Vide Press Release dated 6th May, 2024 the appointment of Justice (Retired) Sanjay Kumar Mishra as the first president of GST Appellate Tribunal is informed.

iv) Advisory dated 28th May, 2024 is issued to inform about the launch of the E-way Bill 2 portal.

B. ADVANCE RULINGS

14  TDS liability on PSU

M/s. Ramagundam Fertilizers and

Chemicals Ltd. (AR Order No.A.R.Com/17/2023 dt. 2nd January, 2024 (Telangana)

The facts are that Ramagundam Fertilizers and Chemicals Limited (RFCL) was incorporated on 17th February 2015 as a public company to set up a natural gas-based ammonia urea complex along with offsite & utility facilities at Ramagundam. RFCL is formed as a Joint Venture Company of various Public Sector Undertakings like National Fertilizers Limited (NFL), Engineers India Limited (EIL) Fertilizer Corporation of India Limited (FCIL) (Promoters) and Govt. of Telangana with participation in equity and control over RFCL. It has set up a natural gas-based ammonia urea complex along with offsite & utility facilities at Ramagundam, Telangana. RFCL supplies urea to National Fertilizers Limited (NFL) and NFL supplies the same to the farmers. Section 51 of the CGST Act requires the notified person to pay GST TDS by deducting the same from its suppliers. The Government of India has notified persons under Clause (d) of Section 51(1) vide notification no.33/2017-CGST (Rate). The Government has also issued Notification No.73/2018-CGST to give exemption from the operation of TDS provisions under certain circumstances.

The applicant has raised the following questions before ld. AAR.

“1. Whether the applicant can be classified under notified persons under section 51 of CGST ACT 2017 read with Notification No. 33/2017 dated 15th September, 2017?

2. Whether the applicant is liable to pay GST TDS by deducting it from the consideration payable to the Supplies?

3. Whether the exemption notification is applicable for the transactions undertaken by the applicant if other applicable conditions remain satisfied?”

The applicant has presented sufficient material to prove that it is covered by section 51(1)(d). The ld. AAR observed that the applicant is established by the Government through the investment policy under the Ministry of Fertilizers as a consortium of nominated Public Sector Undertaking, and the same is approved by the Central Government. It is further noted by the ld. AAR that the revival of RFCL is made on the directions of the government and nominated a group of Public Sector Undertakings for investment purposes and accordingly, a significant part of shareholding is jointly or severally held by Public Sector Undertakings.

The ld. AAR came to the conclusion that the applicant is established by the Government under the Ministry of Fertilizer as a PSU and Cumulative shareholdings in the company i.e., 87.3 per cent belong to Central PSUs & the State Government of Telangana. Hence, the applicant falls under section 51 (1)(d) of the CGST Act. It is accordingly held that the benefit of notification no.73/2018 dt. 31st December, 2018 is available to the applicant and gave the following ruling.

Questions Ruling
1. Whether the applicant can be classified under notified persons under section 51 of CGST Act,2017 read with Notification no.33/2017 dated
15th September, 2017?		 Yes
2. Whether the applicant is liable to pay GST TDS by deducting it from the consideration payable to the Supplies? If the recipient is falling under clauses (a), (b), (c) & (d) of the sub-section (1) of section 51 then the applicant supplier will not attract TDS.
3. Whether the exemption notification applicable for the transactions undertaken by the applicant if other applicable conditions remain satisfied? Same as in question (2) above.

15  Rate of tax on leasing of goods with the operator

M/s. Ventair Engineers (AR Order

No.A.R.Com/11/2023 dt. 9th January, 2024

(Telangana)

The applicant, M/s. Ventair Engineers are providing industrial equipment falling under HSN Codes: 84151090, 84798920, 84145930 on rent/leasing with operators and are charging GST tax at the same rate as applicable for such equipment as per the HSN code of equipment. The customers of the applicant took objection that it should be 18 per cent in all cases. To have clarification about the correct position, the following question was raised before the ld. AAR.

“Applicable GST Tax Rate on Rental / Leasing Charges for Industrial Equipments provided with operator falling under HSN Codes: 84151090, 84798920, 84145930.”

The ld. AAR referred to relevant notification no.11/2017, as amended up to 18th July, 2022. The ld. AAR noted that the entry at serial No. 17 enumerates heading 9973 & the service description for leasing or renting of goods is enumerated at sub-entry (vii a) & (viii) and reproduced the same as under:

(viia) Leasing or renting of Goods The same rate of central tax as applicable on supply of like goods involving the transfer of title in goods.
(viii) Leasing or rental services, without an operator, other than (i), (ii), (iii), (iv), (vi) and (viia) above. 9

The ld. AAR observed that as per sub-entry (viii), which enumerates leasing or renting of goods without an operator, a rate of tax of 18 per cent is attracted and since the applicant provides the services along with the operator it will not fall under this classification. The ld. AAR observed that the services of the applicant will fall under sub-entry (vii a) where Leasing or renting of goods is enumerated without reference to the operator. The ld. AAR concluded that as per this entry, the rate of tax is the same as the rate of CGST applicable on the supply of goods involved and accordingly confirmed the view of the applicant.

The learned AAR also referred to the HSN mentioned by the applicant. The Ld. AAR noted that HSN Code 84151090 covers Air Conditioning etc. which is liable to tax @ 28 per cent, as per notification no.1/2017 dt. 28th June, 2017, as amended from time to time.

The ld. AAR noted that the HSN Code 84145930 covers Industrial fans and are liable to tax @ 18 per cent vide Sr. no.317B to Schedule III of Notification 1/2017-CT(R) dated 28th June, 2017.

The ld. AAR also referred to HSN 84798920 which covers Air humidifiers or dehumidifiers and noted that as per Notification 01/2017, dated 28th June, 2017, the applicable Rate of tax is 12 per cent.

Accordingly, the ld. AAR replied by question as under:

Questions Ruling
Applicable GST Tax Rate on Rental / Leasing Charges for Industrial Equipment’s provided with operator falling under HSN Codes: The supplies of rental / leasing services made by the applicant fall under sub entry (viia) of entry of sl. no 17 of Notification 11/2017. Therefore, the rate of tax for the service shall be same as applicable on supply of such goods which are:
1. 84151090 CGST 14 per cent + SGST 14 per cent
2. 84798920 CGST 6 per cent + SGST 6 per cent
3. 84145930 CGST 9 per cent + SGST 9 per cent”

16  Recovery towards Canteen facility — Taxable

M/s. Sundaram Clayton Ltd. (AR Order No.107/AAR/2023

dt. 5th September, 2023 (TN)

The applicant, M/s. Sundaram Clayton Limited is engaged in the manufacture and supply of die-casting parts for use in automobiles. The applicant submitted that they have 3 plants which are located in three different districts of Tamil Nadu namely, Padi (Chennai), Oragadam (Chennai) and Belagondapalli (Hosur) and a registered Corporate Office in Chennai. The applicant is governed by the Factories Act, of 1948 and section 46 of the Factories Act applies to them. The applicant has to provide a canteen facility as per the above provisions. It is further informed that the canteen facility is provided by two models as under:

“a. Model I — Canteen operated by the Applicant (Padi) — Applicant runs the canteen, hired a cook who is their employee and food supplies are bought by the Applicant

b. Model II — Canteen run by a third party (Oragadam and Hosur) — Applicant avails canteen services from its subsidiary company namely Sundaram Auto Components Limited (SACL). There is a common canteen for food preparation operated by SACL. After the food is prepared, SACL sends the food to the Applicant’s dining area within the Applicant’s plant. SACL recovers charges for the canteen facility provided to the Applicant’s workers and the Applicant in turn recovers subsidized amount from its workers.”

The applicant also informed about the recovery of the subsidized amount from the workers/employees as under:

Plant Location Type of worker Recovery per month/day
Padi (own canteen) Regular R25 per month
Trainee R25 per month
Contractors R15 or 30/per day
Oragadam (SACL) Regular R5 per day
Trainee R5 per day
Security R15 per day
Contractors R30 per day
Hosur (SACL) Regular R5 per day
Trainee R5 per day
Contractors R15 per day

It was clarified that the cost over and above recovery is borne by the applicant.

The applicant was canvassing that they are not liable on the above recovery, based on the following contentions:

  • There is no legal intention to provide a canteen facility
  • The provision of taxability is not against consideration but it is a statutory obligation under the Factories Act.
  • It was also contended that the activity of providing a canteen facility does not fall under any of the clauses of the definition of ‘business’. It was submitted that the main business is the manufacture and supply of die-casting parts and the provision of a canteen facility is not incidental or ancillary to their main business.

Therefore, it was contended that there is no liability for recovery from employees. Several judgments and Advance Ruling are cited to support the above contention. The ld. AAR noted that the applicant has raised the following question.

“‘Whether recovery of subsidised value from employees for providing canteen facility

would (a) amount to ‘supply’ under the CGST Act and (b) whether the recovery

would attract GST under the following two models:

  • Model I — Canteen operated by the Applicant within the factory premises
  • Model II — Canteen run by Applicant’s subsidiary company operating within common premises for which the subsidiary company recovers charges from the applicant.”

The ld. AAR also noted the above contentions made by the applicant for non-liability. The ld. AAR referred to the appointment letter issued to employees and noted that there is a clause which mentions that the employee is entitled to use the canteen facility subject to recovery at specified charges.

The ld. AAR observed that the applicant is required to provide a canteen facility as per the Factories Act, 1948 and also required to bear canteen costs. The ld. AAR referred to the definition of ‘business’ in section 2(17) of the CGST Act and reproduced the same as under:

““Business” includes:

(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit:

(b) any activity or transaction in connection with or incidents or ancillary to sub-clause (a);”

The ld. AAR observed that the canteen is established as per the Factories Act and hence it is an activity in furtherance of the business.

The ld. AAR also made reference to the term ‘Outward supply’, as defined in Section 2(83) of the CGST Act, 2017 and reproduced the same as below:

“‘Outward Supply’ in relation to a taxable person, means the supply of goods or services or both, whether by sale, transfer, barter, exchange, license, rental, lease or disposal or any other mode, made or agreed to be made by such person in the course or furtherance of business”.

Supply made by a taxable person in the course or furtherance of business is an ‘Outward supply’. The ld. AAR observed that establishing a canteen is in the furtherance of the business of the applicant and the provision of food in the canteen for a nominal cost is ‘Supply’ for the purposes of the GST Act.

Regarding the contention of applicant that there is no consideration but reimbursement of cost, the ld. AAR referred to the term ‘Consideration’ as defined in Section 2(31) of the CGST Act, 2017 and reproduced the same as under:

“‘Consideration’ in relation to the supply of goods or services or both includes, —

a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government.”

The ld. AAR held that the applicant supplies food to their employees at a nominal cost, and the same
is the consideration for such supply made by the Applicant on which GST is liable to be paid. The judgments cited by the applicant were not applicable. The ld. AAR also held that the provision of food/drinks in the canteen is service as per Clause 6 of Schedule II to the CGST Act.

The ld. AAR also observed that circular no.172/04/2022-GST DT. 6th July, 2022 does not contemplate excluding the canteen facility from taxation. It is only perquisites which are sought to be excluded from taxation. The ld. AAR held that perquisites are non-cash benefits attached to an office or position of employee and cannot apply to a canteen facility which is against consideration.

The ld. AAR thus rejected all contentions of the applicant and held that GST is to be levied on the amount received by the applicant from the employees towards canteen provision.

In respect of Model II, the further argument was that the applicant is merely an agent and hence not liable for reimbursement from employees. However, the ld. AAR rejected the said argument also on the ground that the third person is providing services to the applicant and it is the applicant who provides further provides said services to employees. So this activity is also taxable, held the ld. AAR. Regarding citations, the ld. AAR held that such advance rulings passed by advance ruling authority and appellate authorities cannot be generalized and applied to all cases as they are binding only on the applicant of that Advance Ruling.

The ld. AAR gave the ruling as under:

“Question: Whether recovery of subsidized value from employees for providing canteen facility would (a) amount to ‘supply’ under the CGST Act and (b) whether the recovery would attract Goods and Services Tax (GST), under the following two models:

(i) Canteen operated by the Applicant within the factory premises

(ii) Canteen run by Applicant’s subsidiary company operating within common premises

Answer: For both the models, recovery of subsidised value from employees for providing canteen facility will amount to ‘supply’ under the CGST Act and GST is to be levied on the amount recovered by the Applicant from the employees towards provision of canteen facility.”

17  Canteen Facility – Non-Taxable

M/s. Kolher India Corporation Pvt. Ltd.

(AR Order No. GUJ/GAAR/R/2024/03

(in application no. AR/ SGST & CGST/2023/AR/19)

dt. 5th January, 2024 (Guj)

The applicant, M/s. Kohler India Corporation P. Ltd. is engaged in the manufacturing of plumbing products for kitchens & bathrooms. Their manufacturing facility is in Gujarat and is governed by the provisions of the Factories Act, of 1948.

To comply with this requirement of providing canteen facilities, the applicant entered into a contract with a canteen service provider (for short — ‘CSP’) to provide canteen facilities to their workers at their factory premises.

The CSP raises the invoice along with applicable GST for its canteen services. The invoice is raised by the CSP on the basis of the consumption by the employees of the applicant, which is tracked based on employees of the applicant who avail the canteen facility. A part of the canteen charges is borne by the applicant whereas the remaining part is borne by their employees, which is collected from employee’s salaries and paid to the CSP.

The applicant has relied upon the scope of section 7 of GST and further relied upon various Advance Rulings and judgments and press releases dated 10th July, 2017 as well as circular no.172/04/2022-GST dt, 6th July, 2022.

The applicant also raised the issue about eligibility to ITC. With the following questions were raised before the ld. AAR.

“(i) Whether the subsidized deduction made by the applicant from the employees who are ultimate recipients of the canteen facility provided in the factory / corporate office would be considered as ‘supply’ under the provisions of section 7 of the CGST Act, 2017 and the GGST Act, 2017?

(ii) If the answer to the above is affirmative, the value at which the GST is payable?

(iii) Whether the Company is eligible to take the ITC for the GST charged by the CSP for canteen services, where the canteen facility is mandatory in terms of section 46 of the Factories Act, 1948.”

About canteen recovery, after examination of the given submission, the ld. AAR observed as under:

“Now in terms of Circular No. 172/04/2022-GST, it is clarified that perquisites provided by the ‘employer’ to the ‘employee’ in terms of the contractual agreement entered into between the employer and the employee, will not be subjected to GST when the same is provided in terms of the contract between the employer and employee. We find that factually there is no dispute as far as [a] the canteen facility is provided by the applicant as mandated in Section 46 of the Factories Act, 1948 is concerned; and [b] the applicant has provided a sample copy of the HR Manual [only one page] reproduced supra. In view of the foregoing, we hold that the deduction made by the applicant from the employees who are availing food in the factory would not be considered as a ‘supply’ under the provisions of section 7 of the CGST Act, 2017.”

Thus, it is held that recovery towards the canteen facility is not taxable.

In view of the above, the ld. AAR held that the second question becomes infructuous.

The ld. AAR also dealt with the issue of eligibility for ITC. The ld. AAR held that Input Tax Credit will be available to the applicant with respect to food and beverages as it is obligatory for the applicant to provide a canteen facility under the Factories Act, 1948, read with Gujarat Factories Rules, 1963. The ld. AAR further held that the ITC on GST charged by the CSP will be restricted to the extent of cost borne by the applicant.

18  Classification — Seat covers for motorcycles

M/s. Lion Seat Cushions Pvt. Ltd. (AR Order

No.105/AAR/2023 dt. 5th September, 2023 (TN)

The facts are that the applicant is a manufacturer of Two-wheeler Seat Covers for bikes and scooters. The applicant has sought an Advance Ruling regarding the tax rate on the goods manufactured by them i.e., whether the GST rate of 28 per cent collected and paid for two-wheeler seat covers for Bikes and Scooters under HSN code 87089900 is correct or not?

The applicant submitted that the issue has arisen as other similar manufacturers collect tax @18 per cent under HSN code 9401 2000 or 5 per cent under HSN code 87149990. The applicant narrated that the customers are not buying the said two-wheeler seat covers from the applicant and resisting paying 28 per cent charged by them, referring to the other dealers who are charging lower rates on the same product. Applicant prayed to decide the correct rate.

The department authorities claimed that the goods are covered by heading 8711 or 8714 and levying the rate at 28 per cent is correct.

The ld. AAR examined the above classification under different headings given by the applicant i.e., 8708 9900, 9401 2000 and 8714 9990.

After a detailed examination of the classification under the above heading, the ld. AAR observed its own interpretation as under:

“6.7. Based on the examination of documents submitted by the Applicant, it is clear that they are making seat covers fit to be mounted on the existing seats of the Two Wheelers specifically Hero Honda Motorcycles. These seat covers are meant for the protection of the seats and the functional value of the seat cover is the comfort and convenience it extends to the rider and pillion rider. Thus, the seat cover is nothing but an accessory, which is generally bought by the customer for protection and comfort purposes. The features of the seat cover are distinct and clearly distinguishable from the seat.

6.8. From the above, we find that seat covers are accessories to Two-wheelers. Chapter 87 covers Vehicles other than railway or tramway rolling stock, and Parts and accessories thereof, under which parts and accessories of two-wheelers specifically find place under 8714, which is given as follows:

Chapter / Heading/ Tariff

Item

 Description of Goods
8714 Parts and Accessories of Vehicles of Headings 8711 to 8713.
8714 99 Other
8714 99 10 Bicycle chains
8714 99 20 Bicycle wheels
8714 99 90 Other

The heading CTH 8711 and 8713, are described as under:

Chapter / Heading/ Tariff

Item

 Description of Goods
8711 Motorcycles (including mopeds) and cycles fitted with an auxiliary motor, with or without side-cars;
8712 Bicycles and other cycles (including delivery tricycles), not motorized;
8713 Carriages for disabled persons, whether or not motorised or otherwise, which is reproduced as under:

6.7 Thus, we find that Motorcycles are classified under CTH 8711 and on the seats of such Motorcycles, the seat covers are fitted. Hence, these seat covers are nothing but part and accessories of Motorcycles and fall under CTH 8714, and more specifically, under CTH 87149990.”

Based on the above HSN classification the ld. AAR held that the rate will be 28 per cent, under Sr. no.174
of Schedule IV of Notification 1/2017-CT(Rate) dt. 28th June, 2017. The ld. AAR passed the following ruling:

“Two-wheeler seat covers merit classification under the CTH 87149990 and is taxable @ 14 per cent CGST + 14 per cent SGST vide entry no. 174 of Schedule IV of Notification No. 1/2017-CT (Rate), dated 28th June, 2017, as amended.”

Director’s Personal Liability

The thought of penning this article emerged from two decisions of the Bombay High Court1: The first was a case where a mammoth penalty of ₹3,700 crores was imposed on a key employee of the Company, and the second involved a case where past directors were made liable for tax dues pertaining to a period after their resignation. While the Court ultimately granted relief from such over-ambitious notices, the decision brought to the forefront the monetary exposures hovering over individual(s) operating under the aegis of a company.

1.  Shantanu Sanjay Hundekari v. UOI (WP (L) NO. 30198 OF 2023) & Prasanna Karunakar Shetty v State of Maharashtra (2024-VIL-358-BOM)

Directors are at the forefront of recovery of any statutory liability. In this context, the GST law provides for three areas for discussion — (a) Recoveries of tax dues from directors of private companies including those arising during liquidation; (b) Penalty recoverable from directors for offences committed by Companies; (c) Penalty imposable on directors for aiding or abetting an offence committed by Companies.

The first two categories are recovery provisions where the tax, interest or penalties would be first imposed on the company and in case of their non-recoverability, the extended provisions enable the revenue to recover the tax and penalty from the directors of such companies u/s 89 or 88(3) of the CGST/SGST Act, 2017. The said provisions are exclusive to private limited companies and hence public limited companies fall outside its purview. The third category involves a direct imposition of penalty on the director for aiding or abetting offences u/s 122(3) of the CGST/SGST Act and this applies to directors of both private and public limited companies.

Liability of Directors on Private Company (Section 89& 88(3))

Under the Companies Act, the personal liability of directors is limited to the acts which arise out of breach of trust, fraud, etc. However, it is practically cumbersome for the revenue department to prove such acts have resulted in non-recoverability of tax liabilities. Hence, the provisions of section 89 have been specifically legislated as deeming provisions:

“Notwithstanding anything contained in the Companies Act, 2013 (18 of 2013), where any tax, interest or penalty due from a private company in respect of any supply of goods or services or both for any period cannot be recovered, then, every person who was a director of the private company during such period shall, jointly and severally, be liable for the payment of such tax, interest or penalty unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.……….”

Similarly, section 88(3) contains statutory powers to collect tax dues of companies undergoing liquidation –

“(3) When any private company is wound up and any tax, interest or penalty determined under this Act on the company for any period, whether before or in the course of or after its liquidation, cannot be recovered, then every person who was a director of such company at any time during the period for which the tax was due shall, jointly and severally, be liable for the payment of such tax, interest or penalty, unless he proves to the satisfaction of the Commissioner that such non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.”

While both these provisions are broadly similar in nature, a comparison throws up certain differences:

  • Section 89 provides for recovery even during its regular operations, section 88(3) provides for recovery only during the winding up of the company – being more specific, section 88(3) would prevail over section 89 in the specified circumstances;
  • Individuals holding the directorship during the existence of the company, especially during the initiation of recovery provisions, are covered under section 89, but section 88(3) applies only to directors holding their post at the time the tax was due on the Company — subsequent directors may not be covered by the provisions of section 88(3);
  • Section 89 contains overriding provisions which is absent in section 88(3), enabling it to surpass the Companies Act for recovery of amounts.

With these key differences in mind, the following elements can be dissected and analysed: (i) the overriding character of Section 89; (ii) the pre-condition that the tax dues should be “non-recoverable”; (iii) the tax dues should be in respect of any supply of goods or services; (iv) a negative presumption that directors are liable for payment of tax and rebuttable only if the directors prove that such non-recovery is not on account of gross neglect, misfeasance or breach of duty; (v) the director(s) of the company are jointly or severally liable for such recoveries.

Overriding character

A private limited company, though a separate legal entity, is an artificial person under law. Therefore, the decision-making functions of a company are entrusted to a Board of Directors mandated to operate under a fiduciary capacity. While the directors act as agents or representatives before third parties, the company continues to be primarily liable for all acts performed by the directors within their capacity.

Section 166 of the Companies Act, 2013 specifically lays down that the Directors should operate under the memorandum and articles of association as documented by its members. It is the duty of the Director to act with ‘diligence’ and in ‘good faith’ only to promote the best interests of its stakeholders. The decisions taken by the director should involve reasonable care, judgement and skill independent of personal interests. In case of conflicts (direct or indirect), the director ought to refrain from taking any undue advantage or gain. As directors of a company, they may be held liable for any loss or damage sustained by the company because of any breach of duty or failure to disclose a personal financial interest in a particular matter. They may be directed to repay any gain or advantage derived from their fiduciary duty and liable for penal action under the said Act. Therefore, the Companies Act expects directors to honour their fiduciary capacity and protects them from any liability in case of honest diligence. Losses on account of business exigencies or external factors despite reasonable care do not generally devolve upon the directors.

Consequently, all tax liabilities would first be recoverable from the company unless there are specific provisions enabling recovery from the directors or key managerial personnel. By invoking the Companies Act, recovery of any tax liabilities (as a civil liability) from directors of the company can emerge only after the establishment of a ‘fraud’ or ‘breach of duty’ on the part of the director concerned. Moreover, only the officer in default would be liable and other director(s) disengaged from the finance/ tax function could take shelter as not being in default and outside the recovery net. Being a very narrow provision, the Companies Act places a larger onus on the tax administration to establish such a breach of duty and only then proceed to recover the civil liabilities from the director(s) u/s 166 of the Companies Act, 2013.

Section 89 of GST law overrides this feature of the Companies Act, 2013 for the purpose of recovery of tax dues from private companies. The section is aimed at “looking through” the “separate legal entity” and identifying the directors who have been negligent as representatives of the Company. It simply states that tax recovery can be made from any director of the company ‘jointly’ or ‘severally’ in case taxes are non-recoverable from the Company. An onerous presumption has been placed that the directors have breached their fiduciary duties unless they prove that the non-recovery of taxes is NOT on account of willful neglect, fraud, breach of duty, etc. In view of the negative presumption, the director must come forward to prove that they have been diligent in complying with the statutory responsibilities and such default is not attributable to them. Directors would be obligated to enlist the efforts taken to ensure tax dues were discharged and the failure to discharge them was beyond their reasonable control.

On the other hand, section 88(3) does not contain overriding provisions akin to section 89. Can this be taken to imply that the Companies Act provisions would influence the provisions of section 88(3) at the time of recovery actions on the winding up of the company? It appears that unlike section 89, section 88(3) would have to undergo the rigorous test of fraud, etc. being established prior to invoking recovery from directors during the winding up of the Company. Section 88(3) appears to be milder to this and hence read harmoniously with the Companies Act provisions.

Non-recoverability from the Company

Section 89 of GST law specifies that the taxes should be “non-recoverable” from the Company. It places an onus on the department to exhaust all modes of recovery prior to calling upon directors to discharge the liability of the company2.

2. Indubhai T. Vasa (HUF) v. ITO [2005] 146 Taxman 163 (Guj.);

As a first step, the revenue officer would have to establish that tax, interest and penalty are available for recovery u/s 79. The revenue officer cannot invoke the said provisions pending investigation, adjudication, assessment, etc., Even in respect of confirmed tax demands which are under appeal, sections 78 and 107(7) or 112(8) stay the recovery of the tax dues along with interest and penalty. Hence balance amounts may not be available for recovery until the matter attains finality i.e., matter being decided in the apex court or the right of appeal not being exercised by the taxpayer.

Coming now to section 79, it provides multiple avenues to the tax department for recovery of tax dues of the company i.e., bank accounts, debtors, goods, movable / immovable property or as arrears as land revenue. The said section should be exhausted completely and cannot be short-circuited to directly attach the bank accounts / properties of the director. In essence, recovery officers should reach out to directors only once section 79 leads to a dead end.

Even before the tax department alleges that taxes are due from directors, a specific conclusion is to be arrived at and recorded in writing that the taxes are ‘non-recoverable’ from the company. Under parimateria provisions of Income-tax (section 179), the Bombay High Court3 held that only after the first requirement is satisfied would the onus shift on any Director to prove that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company. In the case of Amit Suresh Bhatnagar4, the court quashed the attempt of the revenue to take effective steps of recovery from the Company and stated that the phrase “cannot be recovered” requires the Revenue to establish that such recovery could not be made against the Company, and then and then alone would it be permissible for the Revenue to initiate action against the Director or Directors responsible for conducting the affairs of the Company during the relevant accounting period. The provision has been specifically inserted to shield the directors from any hasty recovery by the tax department. In summary, only those amounts which are recoverable under section 79 from the Company fall into consideration under both sections and the tax department should exhaust all such recovery remedies under section 79 for a tax due to be non-recoverable.

3. Manjula D. Rita vs. PCIT, [2023] 153 taxmann.com 468 (Bombay)
4. [2009] 183 Taxman 287 (Gujarat)

Now let us take a peculiar circumstance where a company enters insolvency and is either wound up or taken over by another company under a resolution plan. The process of insolvency involves agreement over a resolution plan by operational / financial creditors and other stakeholders. The government’s debt being classified as operational debt would in all likelihood be trimmed down under the resolution scheme. The government being a party to the said proceedings is bound by the resolution plan approved by all creditors in terms of section 31 of the Insolvency Bankruptcy Code5. Once the primary liability on the company’s account is reduced, the vicarious liability on the directors also stands correspondingly reduced. The phrase “non-recoverable” from the company presupposes a right to recover the amounts from the Company. The tax authorities cannot state that the amounts which have been written off continue to be recoverable from directors despite the resolution plan. Moreover, with respect to the reduced tax demands, tax authorities would have to abide by the timelines provided in the resolution plan prior to concluding that taxes are ‘non-recoverable’.

5. Ghanashyam Mishra & Sons Pvt. Ltd. vs. Edelweiss Asset Reconstruction Co. Ltd. — [2021] 126 taxmann.com 132 (SC)

Presumption as to gross neglect, breach of duty, etc.

Section 89 places a statutory presumption that the non-recovery of taxes is on account of gross neglect, and breach of duty on the part of the directors. Since sovereign dues are considered to be supreme obligations, directors (in their fiduciary capacity) are expected to arrange their affairs in such a manner that sovereign defaults are avoided. The presumption is with reference to “nonrecovery” of tax dues and cannot be extended to circumstances prior to the fastening of tax dues — i.e., it refers to the circumstances after the tax demand is affixed on the company and the corresponding actions taken by the directors to make appropriate arrangements for payment of the said tax demands rather than the decision making resulting in the tax demand. For e.g., the directors cannot be held responsible for incorrect classification of goods/services but would certainly be responsible for payment of tax dues once the tax on incorrect classification is confirmed against the Company. Probably the intent of the section is to deter directors from taking evasive acts by depleting the company’s assets and making them responsible for the non-recoverability of taxes. The directors on the other hand would have to overcome the presumption by contending that despite the tax demand, business exigencies and external circumstances have resulted in insolvency and non-recoverability of tax demands.

In Maganbhai Hansrajbhai Patel6, the Gujarat High Court held that gross negligence etc., is to be viewed in the context of non-recovery of the tax dues of the company and not with respect to the functioning of the company when the company was functional. In that case, the revenue had placed the entire focus and discussion with respect to the Director’s neglect in the functioning of the company which was set aside by the Court. A similar view was also taken by Gul Gopaldas Daryani v. ITO7 wherein it was held that though the burden is cast by statute in the negative and on the director concerned, once in defence the director places necessary facts before the revenue to establish that non-recovery cannot be attributed to gross negligence, misfeasance or breach of duty on his part, the revenue is required to arrive at definite findings on negligence on part of directors. In this case, the director could not pay tax dues as its hotel building got damaged in the earthquake, in view of the fact that an insurance claim had been raised but was not passed by an insurance company and civil disputes were still pending, it could not be regarded as a case where director failed to take measures for protecting property or interest of the company. A similar view was held in Ram Prakash Singeshwar Rungta vs. ITO8 where even though directors were responsible for the non-filing of returns were not imposed with such harsh recovery as the emphasis of the section is with respect to neglect during the recovery proceedings against the company and not otherwise.

6.  [2012] 26 taxmann.com 226 (Gujarat)
7.  [2014] 46 taxmann.com 35/227 Taxman 190 (Mag.)/367 ITR 558
8.  [2015] 59 taxmann.com 174/370 ITR 641 (Mag.)

Status of directorship

The other question that arises is whether the individual should be in active directorship during the action of recovery from the tax department or past directors could be engulfed in the recovery actions. Recovery action against directors could be with reference to three different tax periods (a) holding directorship during the relevant tax period for which demand is raised; (b) holding directorship at the time of confirmation of tax demand; and (c) holding directorship while recovery attempts are made by tax department.

This section fixes personal liability on directors based on the nature of acts performed during their directorship. The focus of the section is with reference to the responsibility of the directors to meet tax dues and deter depletion/diversion of assets of the company for other purposes. Exclusion from recovery can be claimed only where the directors prove that they have acted in good faith and business exigencies have resulted in non-recovery of taxes. Naturally, this implies that the individuals should be directors at the time the tax demands are raised and recovery attempts are being made by the revenue. Thus, individuals holding directorship during the relevant tax period for which tax demand has been raised cannot be held responsible for tax demands as they cannot be expected to establish bonafides at a time when they are not holding directorship. But the Bombay High Court9 has held that the true purport of Section 179(1) of the Income Tax Act is that a person must not only be a Director at the relevant assessment year but also a Director at the time when the demand was raised and such Director can be held responsible only and only when “non-recovery” is attributable to gross neglect, misfeasance or breach of duty on the part of such Director.

9. Prakash B. Kamat vs. Pr. CIT [2023] 151 taxmann.com 344 (Bom.)

Unlike section 89, section 88(3) speaks about recovery of tax liabilities during the liquidation of companies and specifies the directors who were holding the position at the relevant tax period for which the taxes were due as responsible for payment of the tax dues on liquidation. Due to the specific identification of directors and linkage to a particular period of default, other directors would not be covered by such recovery action even if they are in directorship during the liquidation of the company.

Tax dues with respect to the supply of goods or services

Interestingly, section 89 provides for tax recoveries only in respect of “supply of goods or services”. This is a consequence of borrowing terms from parallel provisions under the Income Tax Act where the scope is restricted to tax dues in respect of the income of an assessee. Probably, the legislature must have missed recognizing that recoveries under the GST law can arise on four counts (a) output tax in respect of the supply of goods/services; (b) input tax on erroneous utilization; (c) erroneous refunds; and (d) transitional credit. With the missed phrases, one can argue that the recoveries from directors could be only in respect of short payment of output tax on account of non-payment, short-payment, under-valuation, rate classification, etc. While revenue may argue that such a narrow reading would make the provision toothless, courts may view such exceptional provisions very strictly.

Joint and several liability

The phrase ‘joint and several’ liability implies that the directors are both collectively or individually liable for the revenue. The revenue authorities can at their discretion ‘pick and choose’ the directors who they wish to pursue for recovery of their tax liability, irrespective of their involvement in the affairs of the company. To put it differently, while Director A may be responsible for gross negligence in protecting the assets of the company, the revenue can choose to pursue Director B for recovery of its entire dues, no matter that Director B may not have had an active role in the company. In the decision of the Gujrat High Court in Suresh Narain Bhatnagar v. ITO10 the ground raised by the director of the company being only in a technical capacity with limited control did not ipso facto make Section 179 of the Income Tax Act inapplicable to the director. That Section 179 would continue to apply even if the petitioner was functioning in a limited capacity vis-à-vis the company. Hence, it is quite clear from this decision that the degree of involvement of a director in the affairs of the company is not a yardstick in deciding whether Section 179 is applicable to the director or not.

10. [2014] 43 taxmann.com 420/227 Taxman 193/ 367 ITR 254 (Guj.)

Many times, the revenue makes the error of applying the phrase joint and several liabilities qua the directors and the company. Revenue officials pursue the remedy of recovering the tax liability from directors of the company on the premise that directors are jointly and severally liable to the company. Being a vicarious liability, it is important to put in perspective that the joint and several liability is qua the directors among themselves and not qua the company. It is only after crossing the stage of nonrecoverability from the company would the revenue be permitted to make all directors jointly and severally liable for such non-recoverable dues. This can also be confirmed from the earlier phrases which require the revenue to exhaust the recovery from the company and only then proceed to recover the dues from directors.

Time limitation

Section 89 does not contain any time limit for the initiation of recovery action. But it is well understood by many courts including Parle International Ltd. vs. Union of India11 that delay in adjudication defeats the very purpose of the legal process and a taxable person must know where he stands and if there is no action from the departmental authorities for a long time, such delayed action would be in contravention of procedural fairness and thus violative of principles of natural justice. In this case, a long period of about 8 years was set aside as being beyond a reasonable period of time. A similar principle may be adopted in specific cases of delayed recovery after the finalization of tax demands.

11. [2014] 43 taxmann.com 420/227 Taxman 193/ 367 ITR 254 (Guj.)

Type of Directorship

The above provisions include all the directors of the company as responsible for the statutory dues. Among the many types of directors in a Company — managing directors, full-time directors, non-executive directors, independent directors, nominee directors etc., questions arise on the applicability of the above provisions to directors. While executive directors cannot be said to be outside the scope of the above provisions, nominee directors could take shelter in view of their restricted role in the decision-making process of the Company. One would be mindful that the nomenclature by itself does not result in automatic immunity under the above widely drafted provisions. It is the appointment letters, emails/ transcripts, and board resolutions which would establish diligence on their part. Independent directors are appointed for specified public limited companies, and listed companies and hence would anyway be outside the scope of section 89 or 88(3) which are applicable only to private limited companies.

Penalty imposable for aiding/ abetting an offence

Directors can also be held responsible for aiding or abetting an offence by Companies. Section 122(3) provides for penalties on any person who aides/abets an offence as enlisted under section 122(1)(i) to (xxi). Naturally, once a Company is charged with any of the list of offences, directors who are in the knowledge of these offences would also become vulnerable to a charge of penalty under section 122(3). The phrase ‘aiding or abetting’ has its roots in the Indian Penal Code and implies an element of mens-rea in the act of instigating or encouraging a person to commit an offence, or promoting a person into a conspiracy of an offence, or willfully aiding another to facilitate in furtherance of the offence. Since men-rea is not a virtue of artificial persons, the individuals (especially directors) behind the scenes would be considered to be involved in the commission of the offence of companies. The maximum penalty in such cases would be ₹25,000 under each enactment.

Despite all the technicalities discussed above, directors of both private and public companies are answerable under the Companies Act for all their actions. Once fraud by directors is established, it vitiates all technicalities and the Companies Act would make the directors personally responsible for all recoveries by lifting the corporate veil. This makes the role of the Director in financial decision-making cautious and critical. Board minutes, demarcation of funds, operational involvement as evidenced by emails / employees, etc. would play a pivotal role in assessing the diligence of the director. While one may argue that the onus is on the revenue to allege any misdoing, the specific presumptions in law have shifted the primary onus on the directors to establish their bonafide, which obviously involves a written document rather than mere oral assertions.

Recovery provisions are extreme steps where the revenue is empowered to pierce the corporate veil and make the directors responsible for the discharge of their fiduciary duties. As is evident the section is a separate code in itself and all pre-conditions of the section have to be satisfied and duly recorded prior to initiating action against the directors of the company. The directors on the other hand must ensure that they manage the affairs responsibly and protect the assets of the company to discharge the statutory liabilities. The intent of the section is to make directors responsible where the revenue has been deprived on account of fraudulent depletion of assets of the company. Amongst the directors, each director should take precautionary steps and inter-alia act as a check for actions by other directors keeping in mind the overall interest of the company. In law, these matters are addressed by Courts based on the facts produced by the directors in their defence and hence the directors need to record all their actions to prove their diligence in their duties.

Builders and Developers – Understanding Reconciliation of GST and Accounting Records

This article aims at understanding the need and areas for reconciliation between accounting and GST records in the case of real estate sector. In accountancy the objective of reconciliation is to explain differences between two sets of financial records. Unexplained differences in the process of reconciliation signifies a possible red flag. Hence, reconciliation becomes relevant whenever transactions are differently recorded in two sets of financial records.

In simple transactions involving outward supply of goods, the revenue recognised in the books of accounts and the financial statements prepared based on the books of accounts as at the end of the year and the value of outward supplies recognised in the GST returns during that particular year would usually be in agreement. However, it may not be the same case when we come to supply of services. For instance, advances in case of services are liable for payment of GST but the income in respect of services provided is recorded only when the services are actually rendered. The situation in case of real estate sector gets even more complex due to the fact that the process of receipt of progressive payments and the ultimate transfer of possession of the unit sold to a buyer may happen over several accounting periods.

Tax payers declare their gross receipts / gross turnover to the Income Tax authorities by furnishing their annual Income Tax Return (‘ITR’). On the other hand, turnover relating to outward supplies of goods and services (taxable as well as exempt) are furnished by the tax payers in the monthly GSTR-1 and GSTR-3B. Further, in the annual return that the tax payer furnishes in GSTR-9 he consolidates the monthly turnovers and also declares details of no-supply (that is, transactions neither amounting to supply of goods nor supply of services). Depending upon the nature of business there could be various reasons for differences between the gross turnover declared by the tax payers to both these authorities.

In order to check potential tax evasion, there is a mechanism in place for sharing data between Income Tax Department and the Goods and Services Tax Network that aims at identifying differences between income declared to both these authorities and sending out alerts to the tax payers requesting them to explain the differences.

GST VS. ACCOUNTANCY — REASONS FOR THE GAP BETWEEN THE TWO RECORDS

Fundamentally, accounting principles are based on the matching concept. This is an important concept under the accrual method of accounting. Under this concept one recognises revenue when it is earned, and expenses incurred for earning such revenue in the same period. This ensures that the earnings reported in a period are accurate. Further, accounting follows the concept of conservatism. Under this concept expenses and liabilities should be recognised as soon as probable in a situation where there is uncertainty about the possible outcome and in contrast assets and revenues should be recorded only when they are assured to be received. However, the liability to pay GST would be guided by the provisions of time of supply provided in GST Law1.

  1. Section 12 of the Act in case of supply of goods and section 13 of the Act in case of supply of services.

Due to the above there is always a difference between the financial data as per books of accounts and the data as per the GST records. This precisely is the reason for need to reconcile both these records.

As far as accounting principles are concerned, general principles of accountancy equally apply to the real estate industry. However, there is one unique feature inherent to this sector, that is, duration of the activity of provision of construction services as stated above. Further, another reconciliation challenge is due to the fact that transactions in the Real Estate Industry take different forms and are inherently complex.

TYPICAL LIFE CYCLE OF SALE OF UNDER-CONSTRUCTION UNITS CONSTITUTION

Sale of under-construction units involves sale of units that are not complete at the point in time when the agreement for sale of the said unit is entered between the developer and the buyer. The entire process of sale passes through the following stages:

  • Filing of booking form by the prospective buyer and customer KYC.
  • Demand/ Receipt of booking advance.
  • Entering into an agreement of sale / agreement for sale of the unit(s).
  • Issue of demand notes (Tax Invoices) for milestone payments.
  • Completion of project.
  • Handover of possession of the unit.

ACCOUNTING PRINCIPLES APPLICABLE TO REAL ESTATE SECTOR

Due to its inherent nature the sale of under-construction units spans over more than one or two accounting periods. Accounting of transactions in real estate sector are guided by the Guidance note2 issued by the ICAI. The Guidance Note is based on the theory of risks and rewards and lays down the principles of revenue recognition by identifying the point where the transfer of significant risk and rewards takes place based on the contractual terms between the parties.

2. Guidance Note on Accounting for Real Estate Transactions, 2012 (Revised)

Based on the nature and time of the contract for sale of unit between buyer and seller real estate transactions for sale of units can be divided as under:

  • Sale of a unit while project is under-construction

– Significant risks and rewards transferred to the buyer

– Significant risks and rewards not transferred to the buyer

  • Sale of unit post completion of the project

SALE OF UNIT WHILE THE PROJECT IS UNDER-CONSTRUCTION

The Guidance Note states that the agreement for sale between the developer and the buyer which is entered during the construction phase can be considered to have the effect of transferring all significant risks and rewards of ownership of the property to the buyer provided the agreement is legally enforceable and subject to the satisfaction of conditions which signify transferring of significant risks and rewards.

The Guidance Note further states that in such cases the developer, in essence can be regarded at par with a contractor for the buyer. It suggests to adopt percentage completion method for revenue recognition as per Accounting Standard — 7 on Construction Contracts in such cases.

SALE OF UNIT IN OTHER CASES

Cases other than above could include a case where in terms of the agreement for sale significant risks and rewards are not transferred to the buyer at the time of entering into agreement for sale or where the sale of the unit takes place post completion of the project. The Guidance Note states that in such cases the Completion of Contract method is to be applied and revenue is to be recognised by applying principles laid down in Accounting Standard — 9 on Revenue Recognition relating to sale of goods. It further states that the project can be considered to be complete when following conditions are satisfied:

  • Significant risks and rewards are transferred to the seller.
  • Effective hand over of the possession to the buyer.
  • No uncertainty regarding the amount of consideration that will be derived from the sale.
  • Not unreasonable to expect ultimate collection of revenue from the buyers.

The principles laid down in the accounting standards and the Guidance Note are diagrammatically described as follows:

It is evident from the above that irrespective of the nature of contract the liability to pay GST is to be recognised based on time of supply provisions contained in section 13 of the Act. On the other hand, the point of time when revenue is to be recognised in the books of accounts would depend on various factors as stated above.

TAX TREATEMENT OF REAL ETSTAE TRANSACTIONS UNDER GST LAW

Under the GST law tax is imposed3 on the supply4 of goods or services by a person to another for a consideration. An activity which constitutes a “supply” shall be treated either as supply of “goods” or supply of “services” based on principles laid down in Schedule II5 to the Act. Construction services provided by a developer, except where the entire consideration is received after issuance of completion certificate is considered6 to be supply of services in terms of Schedule II. However, sale of land and sale of building (post completion) is neither a supply of goods nor supply of services7.

3.  The tax is imposed under the charging section 9 of the Central Goods and Services Tax Act, 2017
4.  Section 7 of the Central Goods and Services Tax Act, 2017 defines the scope of the term ‘Supply’
5.  Section 7(1)(c) read with Schedule II to the Central Goods and Services Tax Act, 2017.
6.  Entry 5(b) of Schedule II to the Central Goods and Services Tax Act, 2017.
7.  Entry 5 of Schedule III to the Central Goods and Services Tax Act, 2017

Typically, sale of under-construction flats by developers are considered to be “continuous supply of services8”. In terms of the GST Law9 in case of continuous supply of services, the liability to pay GST arises when each milestone payment becomes due by the buyer to the developer. Every agreement for sale of under-construction unit entered between the buyer and a developer specifically provides for a payment schedule. This schedule is linked to various stages of completion of the project which are known as milestones.

8. Section 2(33) of the Central Goods and Services Tax Act, 2017.
9. Section 13 read with section 31(5)(c) of the Central Goods and Services Tax Act, 2017.

A typical payment schedule as appearing in any agreement for sale of an under construction residential flat or a commercial unit is reproduced hereunder for better understanding. However, it may be noted that in case of any advance payment the same becomes liable for payment of GST on the date such advance is received irrespective of the stage of completion as at the date of receipt of such advance.

Stage Milestones %
1 Booking of the Unit 10
2 Execution of Agreement 20
3 Completion of the Plinth 15
Stage Milestones %
4(a) Completion of 1st floor slab 5
4(b) Completion of 3rd floor slab 5
4(c) Completion of 5th floor slab 5
4(d) Completion of 9th slab 5
4(e) Completion of terrace slab 5
5 Completion of walls, internal plaster, floorings and waterproofing 5
6 Completion of doors, windows and sanitary fittings 5
7 Completion of the staircases, life wells, lobbies upto the upper floor level 5
8(a) Completion of the external plumbing, external plaster, and elevation of the building 5
8(b) Completion of the entrance lobby, lifts, water pumps, electrical fittings, driveways 5
9 At the time of handing over the possession of the apartment to the Allottee 5
Total 100

On achievement of each milestone the developer issues a demand note (Tax Invoice) for recovery of the milestone payment along with GST. However, that does not mean that the amount received / receivable and liable for GST payment would be disclosed as revenue in the books of accounts or the profit and loss account.

RECONCILIATION BETWEEN GST RECORDS AND ACCOUNTING DATA

In the above backdrop it is clear that the stage of completion does not have any impact on the amount on which GST becomes payable. GST is always payable on the amount of milestone-based payment that is due from the buyer to the developer. On the other hand, recognition of revenue in the books of accounts or financial statements is linked to various factors as described above. It is due to this differential treatment under both records that gives rise to difference in the revenue / value (taxable or otherwise) and hence need for reconciliation.

Let us examine with illustrative examples the manner in which revenue is recognised under both the methods viz, percentage completion method and completed project method.

A) PERCENTAGE COMPLETED METHOD

Illustration:

Builder and Co is construing a project comprising of saleable area of 10,000 Sq. ft. Year-wise details of the project relevant for our understanding are as under:

Year-1 of the Project

Out of the total saleable area of 10,000 Sq. Ft. of Builder and Co received bookings for 2 flats admeasuring a total of total 2,400 Sq. Ft. area as at the end of year-1 of the project.

Details of cost and amounts realised as at the reporting date are as under:

Flat Area in Sq. Ft. Agreement Value (Rs) Amount Received (Rs) Amount realised as a % of agreed Value GST (Rs)
1. 1,200 1,00,00,000 3,00,00,000 30 1,50,000
2. 1,200 1,00,00,000 5,00,000 5 25,000
2,400 2,00,00,000 35,00,000 1,75,000

 

Particulars Estimate Actual % of Estimate
Land Cost 3,20,00,000 3,20,00,000 100
Construction Cost 4,00,00,000 80,00,000 20
Project Cost 7,20,00,000 4,00,00,000 56

Let us examine the above facts by applying the conditions for revenue recognition as per the Guidance Note as at the reporting date for the 1st year of the project:

Conditions Response
Is 25 per cent or more of construction cost incurred No
Is 25 per cent of saleable area booked No
Whether 10 per cent or more of the agreement valued received Received in case of one of the units

It is evident that two of the three conditions laid down by the Guidance note for recognising revenue under percentage completion method are not satisfied as at the end of Year-1. Hence, no revenue is to be recognised as at the end of the first year of the project. However, amounts receivable or received during the year-1 shall be liable for payment of GST as per the provisions of time of supply discussed above under the GST Law.

Relevant extract of Profit and Loss account and Balance Sheet as at the end of Year-1 is as under:

Builder and Co

Profit and loss Account for the Year-1

Particulars Amount (Rs) Amount (Rs) Particulars Amount (Rs) Amount (Rs)
– By Contract Revenue –

Builder and Co

Balance Sheet as at Year-1

Liability Amount (Rs) Amount (Rs) Asset Amount (Rs) Amount (Rs)
Advance recieved from Flat Buyers 35,00,000 Work-in-Progress

 

Land Cost

Construction Cost

  

 

 

3,20,00,000

 

80,00,000

  

 

 

 

 

4,00,00,000

Year-2 of the Project

During the Year 2 Builder Ltd received booking for one more unit admeasuring 1,500 Sq. ft. Hence, as at the end of year-2 a total of 3 units have been booked.

Details of cost and amounts realised as at the reporting date of year-2 are as under:

Flat Area in Sq. Ft. Agreement Value (Rs) Year 1 Year 2 Total Amount realised as a % of agreed Value
Amount Received (Rs) GST (Rs) Amount Received (Rs) GST (Rs) Amount Received (Rs) GST (Rs)
1. 1,200 1,00,00,000 30,00,000 1,50,000 20,00,000 1,00,000 50,00,000 2,50,000 50
2. 1,200 1,00,00,000 5,00,000 25,000 30,00,000 1,50,000 35,00,000 1,75,000 35
3. 1,500 1,25,00,000 – – 10,00,000 50,000 10,00,000 50,000 8
3,900 3,25,00,000 35,00,000 1,75,000 60,00,000 3,00,000 95,00,000 4,75,000

 

Particulars Estimate Actual %
Land Cost 3,20,00,000 3,20,00,000 100
Construction Cost 4,00,00,000 1,80,00,000 45
Project Cost 7,20,00,000 5,00,00,000 69

Let us examine the above facts by applying the conditions for revenue recognition as per the Guidance Note as at the reporting date for the 2nd year of the project:

Conditions Response
Is 25 per cent or more of construction cost incurred Yes
Is 25 per cent of saleable area booked Yes
Whether 10 per cent or more of the agreement valued received Received for 2 out of 3 units

It is evident that all the three conditions laid down by the Guidance note for recognising revenue under percentage completion method are satisfied as at the end of Year-2 in respect of 2 of the 3 units booked. Hence, at the end of the Year-2 revenue under percentage completion method can be recognised. Computation of various disclosures as per the Guidance Note and AS-7 are as under. However, amounts receivable or received during the year-2 in respect of all the 3 units shall be liable for payment of GST as per the provisions of time of supply discussed above under the GST Law.

Revenue to be recognised

(2,00,00,000 * 69.4444 per cent)

 : 1,38,88,889
Cost to be recognised

(5,00,00,000 * 2,400 / 10,000)

 :1,20,00,000
Work in Progress as at the reporting date :3,80,00,000

Relevant extract of Profit and Loss account and Balance Sheet as at the end of Year-2 is as under:

Builder and Co

Profit and loss Account for the Year-2

Particulars Amount (Rs) Amount (Rs) Particulars Amount (Rs) Amount (Rs)
To Construction Cost

 

To Profit

  

 

1,20,00,000

 

18,88,889

 By Contract Revenue  

1,38,88,889

Builder and Co

Balance Sheet as at Year- 2

Liability Amount (Rs) Amount (Rs) Asset Amount (Rs) Amount (Rs)
Advance received from Flat

Buyers

Op.Balance

Add: Recd during the Year

 

Less: Re-claased under Debtors

  

 

 

 

35,00,000

 

 

60,00,000

95,00,000

 

 

 

-85,00,000

  

 

 

 

 

 

 

 

 

 

 

 

10,00,000

 Work – In – Progress

Land Cost

Construction Cost

 

Less: Cost Recognised

 

Amount Due from Flat Buyers

Revenue Recognised

Less: Payments recd for above

  

 

3,20,00,000

 

1,80,00,000

5,00,00,000

 

-1,20,00,000

 

 

 

 

1,38,88,889

 

-85,00,000

  

 

 

 

 

 

 

3,80,00,000

 

 

 

 

 

 

53,88,889

Now on the basis of the above it is evident that the revenue recognised in the profit and loss account is ₹1,38,88,889 as against the GST turnover for year-2 being ₹60,00,000 only (cumulatively ₹95,00,000 up to Year-2).

B) COMPLETION OF CONTRACT (PROJECT) METHOD OF REVENUE RECOGNITION

Under this method the revenue of a project is recognised only when the construction service has been completed. Under this method in the case of real estate sector the revenue from a project shall only be recognised in the year when the construction is completed to the extent of the flats that have been sold. Usually, in this case all amounts due and received from the flat buyer are recognised as advance and the costs are accumulated as Work in Progress in the Balance Sheet. In the year of completion, the revenue and costs to the extent of flats sold would be taken to the Profit and Loss Account. In this case demand notes issued based on point of taxation provisions need to be reconciled with the advance from flat purchaser ledger.

DISCLOSURES OF REAL ETSTAE TRANSACTIONS IN GST RETURNS

Chapter IX of the Central Goods and Services Tax Act, 2017 contains provisions for filing of returns by the tax payer. In case of real estate transactions, the income accrued and the manner of declaration in returns is briefly tabulated in table below:

Nature of transaction Disclosure in GST returns Accounting implication
GSTR-1 GSTR-3B GSTR-9 GSTR-9C
On receipt of advance/ booking amount Furnished in Table 11A as advance received. Furnished as taxable outward supplies in Table 3.1(a) along with other taxable supplies. To the extent the advance remains unadjusted as at end of the year the same shall be disclosed in Table 4F. To the extent the advance remained unadjusted as at the beginning of the current year it shall be reported in Table 5I.

 

To the extent the advance remains unadjusted as at end of the year the same shall be disclosed in Table 5C.

 Amount of advance received will appear as a credit entry in the “Flat Purchaser ledger”.

 

However, it may be noted that every credit entry in this ledger does not imply that it is taxable receipt.

There could be various reasons like stamp duty collection, re-credit on dishonour of cheque which would appear as a credit entry in this ledger.
On issue of demand note or Tax Invoice for stage-wise progressive payments Furnish details in Table 4/ 7.

 

To the extent tax already paid on advance received the same needs to be adjusted in Table 11B.

 Furnish details in Table 3.1(a) as taxable outward supplies.

 

Advance adjustment to be reduced from value reported in Table 3.1(a).

 Total value of demand notes and GST thereon shall be disclosed in Table 4A or 4B.

 

In case of sale of completed unit the same shall be disclosed in Table 5(F) as “No Supply”.

 GSTR-9C requires tax payer to reconcile the turnover as per audited financial statements with the GST turnover reported in GSTR-9.

 

The revenue recognition in case of builders and developers depends on the method followed in each case.

 On issuance of demand note a debit entry will appear in the flat purchaser ledger. The debit entry shall be for the amount receivable as progressive payment plus GST thereon.

 

It is common for developers not to record these debit entries and only record receipts in the flat purchaser ledger.

 

In some other cases all debit entries passed may be reversed at the end of the year.
In case of sale of completed units the same may be disclosed in Table 8 as non-GST supplies.

 

Some tax payers may not show such transactions in GSTR-1 since the same is neither supply of goods nor supply of services.

 In case of sale of completed units the same shall be disclosed in Table 3.1(e) as non-GST outward supplies.

 

Some tax payers may not show such transactions in GSTR-3B since the same is neither supply of goods nor supply of services.

 Some tax payers may not show such transactions in GSTR-9. Under percentage completion method revenue recognised in the profit and loss account may depend on costs incurred as at the date of balance sheet and other factors as discussed above.

 

As an alternative tax payers may reconcile turnover of demand notes with the GST turnover instead of starting Table 5A with the revenue as per Profit and Loss account.

 Hence, it would be important for one to examine the method of accounting followed in every case and accordingly analyse the books of account.

 

At times a flat purchaser may engage the developer for the interior decoration of his unit. In such cases the debit entries to the flat purchaser ledger may attract GST @ 18 per cent as a works contract service.
Credit Note issued against flat cancellation. Credit note shall be disclosed in Table 9.

 

However, in cases where time limit10 for issuance of credit note has expired the developer shall issue a financial credit note after deducting the amount of GST collected on demand notes.

 

It has been clarified11 that in such cases the flat buyer may apply for refund of such GST.

 The value of Credit note, and tax thereon shall be reduced from the amount disclosed in Table 3.1(a). To be furnished in Table 4I.

 

In case no GST is reversed in respect of credit notes issued (financial Credit Notes) the same shall not be reflected in GSTR-9.

 Value of Credit notes where GST has been reversed shall not be reported in GSTR-9C, presuming that the amount furnished at Table 5A is total of demand notes less the value of Credit notes where GST is reversed.

 

In cases where no GST has been reversed in respect of credit notes issued (financial Credit Notes) the same shall be reflected in Table 5J.

 

The above treatment shall much depend on what is the starting point at Table 5A of GSTR-9C.

 The flat purchaser shall be credited with the amount to be refunded including GST amount where the Credit note includes GST.

 

Amount of GST reversed shall be debited to the output tax ledger.

 

Where a financial credit note is issued the value of the credit note (excluding the GST amount) shall be credited to the flat purchaser ledger.

 
10. As per section 34(2) of the Central Goods and Services Tax Act, 2017 details of credit note(s) in respect of a Tax Invoice issued during a financial year need to be disclosed not later than 30th day of November of the following financial year.
11 Circular 180/20/2022-GST, dated 27th December, 2022.

RECONCILIATION OF DEMAND NOTES WITH AGREEMENTS MILESTONES

Varied accounting practices may be followed by various developers. In many cases (common in cases where project completion method is followed) only actual receipts from flat buyers is recorded in the balance sheet. In these cases, for the purposes of GST it becomes important to analyse the milestone payments receivable by comparing the agreements with the demand notes issued during the year. The steps to be followed in these cases shall be as follows:

  • Prepare a list of flats which have been booked since inception
  • Identify stage of completion at the beginning of the year
  • List down the project milestones achieved during the year
  • Map these milestones with those stated in the agreement for determining the point in time when demand notes need to be issued
  • Compare the liability as per above with the GST liability actually paid during the year.

RECONCILIATION DUE TO DIFFERENCE IN VALUATION

Another reason for reconciliation difference between GST records and revenue as per books is the base value on which GST is charged. The rate notification12 states that in case of real estate sale of under-construction units that involve transfer of property in land or undivided share of land, the value of construction service shall be equivalent to the total amount charged for the unit less 1/3rd of such value towards value of land or undivided share of land. Revenue shall be recognised in the books of accounts or financial statements based on the agreement value / consideration of the unit while the value disclosed in the GST records shall be agreement value less the value of land. This also would be one reason for the difference and hence a part of the reconciliation.

12 Notification No. 11/2017-Central Tax (Rate), dated 28-6-2017 (as amended).

FREE SALE AND EFFECT ON RECONCILIATION

Real Estate transaction takes different forms and various business models may exist. It is common to enter into joint development agreements with land owners. Here the land owner gives the developer a right to develop on his land parcel and in return may be given an area share in the form of certain flats free of cost. In such cases the developer is known as a promotor and the land owner is known as a co-promotor. The supplies involved in such a transaction can be understood with the help of the following diagram:

In terms of the GST law supply of flats by the developer to the land owner in consideration for supply of development rights is liable for payment of GST. Hence, the developer shall pay GST on the value of these flats. However, since this does not involve any monetary consideration the same shall not be recorded as revenue in the books of account or profit and loss account of the developer. This would lead to a difference between the turnover recorded in the GST records as compared to the revenue recognised in the books of accounts of the developer.

Before parting, in view of the author, it would be a better practice to analyse the data relating to milestone payments receivable during the year as per contractual terms and reconcile them with the demand notes issued by the developer to the buyer to correctly determine and compare the amount of value or turnover declared in GST returns. At times it may be impracticable or difficult to reconcile or map the financial turnover with the GST turnover. The exercise may become even complex in case where multiple projects are carried out by the developer in the same entity.

Goods And Services Tax

HIGH COURT

17 AnishiaChandrakanth vs. Superintendent,

Central Tax and Central Excise [2024] 162

taxmann.com 115 (Kerala)

dated 09th April, 2024.

Late Fees under section 47(2) are applicable only for a delay in filing of GSTR-9 and not GSTR-9C. Annual return GSTR-9 filed without 9C may be deficient attracting a general penalty. Demanding late fees exceeding ₹10,000 for annual returns covered under the Amnesty scheme declared notification No.7/2023-Central Tax is unjust and unsustainable, even if the returns are filed before the introduction of the said Amnesty scheme.

FACTS

The petitioner filed the annual return in FORM GSTR-9 and GSTR-9C for F.Ys. 2017–18, 2018–19 and 2019–20 belatedly as under.

A show cause notice was issued to the petitioner for the levy of a late fee under section 47(2) of the CGST / SGST Act by calculating the number of days of delay in filing annual returns from the due date of filing of GSTR-9 till the date of filing of GSTR-9C. The petitioner submitted that the late fee is leviable up to the late filing of the GSTR 9 return and not the GSTR-9C reconciliation statement. He further argued that by Notification No.7/2023-CT dated 31st March, 2023, the Amnesty Scheme was introduced with respect to the non-filers of GSTR-9 returns for non-filers of the returns for the financial years 2017–2018 to 2021–2022, by waiver of late fee in excess of ₹10,000 to be paid under section 47 of CGST / SGST Act if the returns are filed up to 31st August, 2023. Since the petitioner paid GSTR-9 on or before the commencement of the Amnesty Scheme the petitioner should also be extended the benefit of the said notification. The department contended that the date of filing of the GSTR-9C would be the relevant date for calculating the late fee if the same is not filed along with the GSTR-9 and that the Amnesty Schemeis applicable only for the returns filed during the period 01st April, 2023 up to 31st August, 2023 and not if the returns are filed outside the said period.

HELD

The Hon’ble Court observed that the GST portal does not support payment of late fees for late filing GSTR-9C. Annual return GSTR-9 filed without 9C may be deficient attracting a general penalty. However, a late fee cannot be made applicable for regularising the GSTR-9 by filing GSTR-9C. Hon’ble Court further observed that when the Government itself has waived the late fee under the aforesaid two notifications Nos.7/2023 dated 31st March, 2023 and 25/2023 dated 17th July, 2023 in excess of ₹10,000, in case of non-filers there appears to be no justification in continuing with the notices for non-payment of late fee for belated GSTR 9C, that too filed by the taxpayers before 01st April, 2023, the date on which one-time amnesty commences. The Hon’ble Court therefore declared the notice demanding a late fee in excess of ₹10,000 as unjust and unsustainable with a caveat that the petitioner shall not be entitled to refund of late fee already paid in excess of ₹10,000.

18 Tvl. Cargotec India (P.) Ltd. vs. Assistant Commissioner (ST) [2024] 162 

taxmann.com 83 (Madras)

dated 23rd April, 2024.

The Hon’ble Court directed a refund of tax recovered by debiting the electronic ledger of the assessee before the expiry of three months i.e., statutory period for filing an appeal, after observing that the authority had failed to explain the reasons for taking recourse under proviso to section 78.

FACTS

The assessment orders for three years were issued on 28th December, 2022 and appeals were filed on 06th April, 2023. However, the recovery proceedings were initiated even prior to the expiry of the three-month period and the amounts were debited from the petitioner’s Electronic Cash and Credit Ledgers in February 2023. Aggrieved by the same, the petitioner sought a direction for re-credit or refund of the amounts recovered under the said assessment orders.

HELD

The Hon’ble Court observed that although the proviso to section 78 permits the recovery of assessed dues prior to the expiry of a period of three months, the said proviso could be invoked only if the proper officer has recorded in writing the reason as to why he considers it expedient in the interest of revenue to require a taxable person to make payment even before the expiry of prescribed three month period. The Hon’ble Court noted that in the instant case, the respondents failed to satisfactorily explain the recourse to the proviso to section 78 and hence directed the respondent authority to either refund the recovered amount or re-credit the same to the petitioner’s Electronic Cash or Credit Ledgers.

19 Maple Luxury Homes vs. State of Rajasthan

[2024] 162 taxmann.com 34 (Rajasthan)

dated 18th April, 2024.

Where the Notice in RFD-08 proposing rejection of refund does not contain the reasons for rejection of refund, the Hon’ble Court sets aside the order holding that provisions contained in Rule 92(3) of CGST Rules 2017 incorporate the principles of natural justice as it mandates and obligates the proper officer to disclose to the applicant the reason for his tentative decision to reject refund application with an object to invite response, consider the same and pass the order.

FACTS

Petitioner-assessee engaged in construction and development business received advance consideration on account of the agreed supply of a flat from a buyer and it discharged its GST liability in GSTR-3B. However, before the completion of construction, the booking of flats was cancelled due to casualty. Petitioner filed an application for refund of GST paid by it on account of supply having not been completed due to cancellation of the agreement. Authority issued a notice in GST-RFD-08 and thereafter the impugned order was passed rejecting the refund claim of the assessee.

The petitioner contended that Rule 92 of the Central Goods and Services Tax Rules, 2017, mandatorily requires the competent authority to issue a notice stating the reasons for the proposed rejection of a claim. However, in the present case, the show cause notice issued in FORM GST-RFD-08 was completely non-speaking and did not incorporate any reason whatsoever. The petitioner submitted a reply on a speculative basis. It was only when the final order was passed that the Petitioner became aware of the reasons for not accepting the claim for a refund. The Petitioner therefore contended that the order passed by the authority is in apparent violation of principles of natural justice incorporated under the statutory scheme of Rule 92(3) of the Rules, 2017. The department contended that the petitioner is raising only technical grounds and that it is not a case where no opportunity for a hearing was afforded.

HELD

The Hon’ble Court held that provisions were included in the CGST Rules 2017 to ensure that before rejection of the claim, the applicant comes to know why his application is being rejected so that he could get an opportunity to satisfy the authority that the tentative reason/satisfaction is not correct. The object and purpose seem to minimise the error in the decision-making process. It is for this reason that the principles of natural justice have been incorporated in the aforesaid provision mandatorily requiring the proper officer to communicate the reasons for such satisfaction, obtain a reply from the concerned applicant and then pass an order.

The Hon’ble Court observed that if what has been stated in the GST-RFD-08 notice with regard to reasons is juxtaposed with the reasons that have been assigned in the impugned order to reject the claim of refund, it would be clear that what was stated in the impugned order to reject a claim for refund was not at all stated, even briefly, in the said show cause notice. Hence it was held that the issuance of a show cause notice was only an empty formality rather than making it meaningful requiring the assessee to offer its reply to the reasons for the proposed rejection of the application for a claim of refund. Hence the order was set aside and remitted the matter to the proper officer for issuance of proper notice in FORM GST-RFD-08 and proceed accordingly.

20 (2024) 18 Centax 259 (A.P.) SRS Traders vs. Assistant Commissioner (ST)
dated 19th March, 2024.

The defect of unsigned order uploaded by the adjudicating authority is invalid in the eyes of the law and cannot be cured by taking shelter of provision of rectification of mistake apparent from the record or mode of communication of order.

FACTS

Respondent passed an order and electronically uploaded it without any signature under section 74 of CGST ACT 2017. The said order was issued in non-consideration of objections as well as in the absence of a signature by the valid officer on the order. Being aggrieved by such an order, the petitioner filed a writ petition before Hon’ble High Court.

HELD

Hon’ble High Court relied upon the conclusion arrived in the case of A. V. Bhanoji Row vs. Assistant Commissioner (ST) in W.P.No. 2830 of 2023 wherein it was held that sections 160 and 169 of CGST Act, 2017 cannot safeguard and justify unsigned orders in any manner. In view of the aforementioned, the Hon’ble High Court allowed this petition and thereby directed to set aside the unsigned order and issue fresh orders expeditiously in consonance with the law.

21 (2024) 14 Centax 295 (Cal.) Arvind Gupta versus Assistant Commissioner of Revenue State Taxes

dated 04th January, 2024.

Appellate Authority should consider the appeal beyond the statutory limit of 4 months on merits where the justifiable reason for the delay in filing the appeal was provided.

FACTS

The petitioner was suffering from carcinoma maxilla and was regularly visiting hospital for the treatment during July 2023. Petitioner had filed an appeal beyond the statutory limit of 4 months and stated the above medical reasons in Annexure to GST APL – 01 along with sufficient evidence for the delay. Appellate Authority without taking the reasons for delay into consideration rejected the appeal on the ground of delay in filing the appeal beyond the statutory time limit of 4 months (i.e. 3 months + 1 month). Being aggrieved by the Order of Appellate Authority, the petitioner filed a writ petition before the Hon’ble High Court.

HELD

Hon’ble High Court followed the conclusion arrived in the judgment of S.K. Chakraborty & Sons versus Union of India & Others (MAT 82 of 2022 dated 01st December, 2023) and held that Appellate Authority has the power to condone the delay in filing of the appeal if sufficient reasons for condonation of delay are provided by the Appellant. This is so because in the case of S. K. Chakraborty’s decision (supra), it was inter alia held, “The co-ordinate Bench in Kajal Dutta (supra) has construed the provisions of section 107(1) and (4) of the Act of 2017 and held that the statute does not state that beyond the prescribed period of limitation, the appellate authority cannot exercise jurisdiction”. “Prescription of a period of limitation by a special statute may or may not exclude the applicability of the Act of 1963 (The Limitation Act), particularly section 29(2) thereof should be considered.” Also, “section 107 of the Act does not excludethe applicability of the Act of 1963 expressly.” Therefore, High Court ordered Appellate Authority to considerthe appeal on merits and decide the same inaccordance with law. Accordingly, the writ petition was allowed.

22 (2024) 18 Centax 48 (Jhar.) East India Udyog Ltd. vs. State of Jharkhand
dated 13th April, 2024.

Interest on delayed filing of returns cannot be demanded without any adjudication proceedings.

FACTS

Petitioner was engaged in the business of manufacturing various types of power distribution transformers, conductors and cables. There was a delay in filing the return for the period from June 2018 to March 2019. Petitioner received a notice for non-payment of interest amounting to ₹92,96,0423 due to a delay in filing the return. Thereafter, a show cause notice was issued, and the order was passed without any opportunity for hearing or adjudication. The petitioner preferred an appeal to contest the order but was dismissed without any remedy. Being aggrieved by the appellate order, the petitioner filed a writ petition before the Hon’ble High Court.

HELD

Hon’ble High Court relied upon the conclusion arrived in the judgment of R.K. Transport Private Limited, Phusro, Bokaro vs. Union of India [W.P. (T) No. 1404 of 2020 dated 16th February, 2022] andMahadeo Construction Co. vs. Union of India [2020(36) G.S.T.L 343 (Jhar.)], wherein it was held that without initiating adjudication proceedings under section 73 or 74 of CGST Act 2017, demand for payment of interest cannot be raised due to delayed filing of return. The Hon. Court inter alia observed as follows:

“32. Therefore, it is evident that the dispute between the parties to the litigation is not with regard to the very liability to pay interest itself but only on the quantum of such liability. In order to decide and determine such quantum, the objections raised by each petitioner shall have to be, certainly, considered. Undoubtedly unilateral quantification of interest liability cannot be justified especially when the assessee has something to say on such quantum.”

Further Hon’ble High Court stated that a bench of co-equal strength must follow the decision of another bench of co-equal strength. Accordingly, a petition was disposed of, with liberty to the department to initiate the adjudication proceeding.

23 (2024) 15 Centax 444 (Bom.) NRB Bearings Ltd. vs. Commissioner of State Tax

dated 14th February, 2024.

Rectification of bonafide errors in GSTR-1 should be allowed and recipients should not suffer denial of ITC where tax has been paid to the Government.

FACTS

Petitioner made a clerical error while reporting invoice details in GSTR-1 pertaining to F.Y. 2017–18. This error resulted in a mismatch between GSTR-3B and GSTR-2A and denial of ITC in the hands of the recipient viz. Bajaj Auto Ltd. Thereafter, the petitioner approached the jurisdictional officer for rectification of invoice details in GSTR-1 of December 2019. Also, the petitioner referred to Circular 2A of 2022 and submitted a CA Certificate stating that GST liability was duly discharged on the said transaction. In respect the submissions, no response was received regarding the rectification of GSTR-1. Under such circumstances, the petitioner filed a writ petition before the Hon’ble High Court of Bombay.

HELD

Hon’ble High Court relied upon the decision in the case of M/s. Star Engineers (I) Pvt. Ltd. vs. Union of India &Ors. dated 14th December 2023, wherein it was held that in case of a bonafide error where no loss is caused to the exchequer, technicalities must not restrict legitimate rectifications. Accordingly, a writ petition was allowed by permitting the petitioner to rectify GSTR-1 for the period 2017–18. However, the eligibility of ITC in the hands of Bajaj Auto Ltd. was kept open.

Recent Developments in GST

A. NOTIFICATIONS

1. Notification No. 09/2024-Central Tax dated 12th April, 2024

The above notification seeks to extend the due date for filing FORM GSTR-1, for the month of March 2024 till 12th April, 2024. (One-day relief due to technical glitches).

B. ADVANCE RULINGS

10 Job Work vis-à-vis Composite Supply
M/s. Zuha Leather Pvt. Ltd. (AR Order No. 36/AAR/2022 dated 30th November, 2022 (TN)

The applicant has filed an application for Advance Ruling, raising the following question:

“Whether the activity of tanning, with chemical consumption, carried out by the applicant is coming within the purview of job work chargeable to tax under item i(e) of the Heading 9988 i.e., Manufacturing Services on Physical Inputs (Goods) owned by Others, and, if not what would be the applicable tax rate?”

The applicant submitted that he is basically a tanner carrying out the activity of tanning process on hides and skins (Chapter 41) and selling the finished product viz., finished leather. It was further submitted that apart from its own manufacturing activity, he is carrying out job tanning (work) i.e., carrying out the activity of tanning process on the hides and skins owned by others. In such process of tanning, the applicant procures and transfers tanning chemicals which are chargeable to tax @ 18 per cent. The applicant was apprehensive that if the transaction is composite supply, the rate will be different and if considered as job work supply the rate will be different. Therefore, this AR was filed. In the course of AR proceedings, the applicant explained the nature of the activity. It was explained that the contract of tanning, essentially involves either —

a. Conversion of raw hides and skins (Chapter 41) into finished leather (Chapter 41) or

b. Conversion of raw hides and skins into wet blue or crust leather or

c. Conversion of wet blue or crust leather to finished leather or

d. Any other intermediary process/es.

It was explained that the intent of the contract is to process or tan the required type of finish on the input leather supplied by the principal and the price for such work (i.e., job tanning charges) has been agreed mutually by the Principal and the Job worker.

Citing the definition of ‘job work’ in section 2(68), the applicant submitted that the activity is a job work activity. Supporting precedents cited. The whole process of job work is explained with a flow chart.

The ld. AAR made reference to Section 2(68) of the GST Act according to which the term ‘job work’ means any treatment or process undertaken by a person on goods belonging to another registered person.

The ld. AAR also referred to the definition of ‘Composite Supply’ defined in section 2(30) and reproduced the same as under:

“Composite Supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.

Illustration: Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and the supply of goods is a principal supply;”

The ld. AAR analyzed facts as under:

“In the instant case, on perusal of the invoices of job work and flowchart of the process submitted by the Applicant, it is clear that hides and skins (Chapter 41) are received from Applicant’s customer for the job work of tanning and that certain tanning chemicals are added to assist the tanning process. After various processes, the raw hides and skins (Chapter 41) are converted into finished leather (Chapter 41) and returned back to the Applicant’s customer. The Customer (M/s Century Overseas -who is a registered person-Principal) while transporting the raw hides and skins and receiving the finished product, does not transfer the ownership to the Applicant. This is apparent in the Job Tanning order given by the customer (M/s Century Overseas). The terms and conditions stipulate that the Applicant (M/s Zuha Leathers) should return the goods without any damage. Hence, it is clear that the Applicant in the instant case is the job worker, who has to process the rawhide supplied by the Principal and after the tanning process (job work) return the same to the Principal. In the course of the tanning process, Applicant is using some tanning chemicals which are consumed in the process. It is not unusual for a job worker to add some inputs to aid his job work process. But, it remains a job working process and it is pertinent to note in the instant case that both the raw material (hides & skins) and finished product (finished leather) fall in Chapter 41. Also, it cannot be treated as a composite supply, if we analyze the illustration given in the definition of Composite Supply cited supra. Therefore, the activity of the Applicant in processing (tanning), the rawhide owned by the Principal into finished leather falls within the purview of job work.”

Accordingly, the ld. AAR clarified activity as ‘job work’.

Referring to entry 3 in Schedule II, the ld. AAR held that it is the supply of service. Regarding the rate of tax, the ld. AAR referred to Notification no.11/2017-Central Tax (Rate) dated 28th June, 2017 as amended by Notification No.20/2017 prescribing the rates of tax for manufacturing services on physical inputs (goods) owned by others.

The ld. AAR also made reference to CBIC Circular No. 126/45/2019-GST [F. NO. 354/150/2019- TRU], dated 22nd November, 2019 in which clarifications are given about above notification.

Based on the above background, the ld. AAR held that the rate wouldwould be 5 per ce if the activity is for registered persons. The ld. AAR held that if the activity of the applicant is undertaken on goods which are owned by persons other than those registered under the CGST Act, then the applicable rate will be 18 per cent.

11 Supply of goods vis-à-vis Services
M/s. Precision Camshafts Ltd.
(AR Order No. MAH/AAAR/DS-RM/16/2022-23 dated 20th January, 2023 (MAH)

This appeal arose out of AR order No.GST-AAR-22/2020-21/B-36 dated 29th March, 2022. The appellant had put up the following question for advance ruling:

“Whether the supply of “assistance in design and development of patterns used for manufacture or camshaft” to a customer is a composite supply of services, the principal supply being supply of services?”

The ld. AAR has given the ruling as under:

“The activity of design and development of patterns used for manufacturing of camshaft for a customer is a supply of service in the form of intermediary service.”

In appeal, the appellant once again explained the whole activity. The appellant receives two separate orders from Original Equipment Manufacturers (OEM), one for assistance in the design and development of patterns used for manufacturing camshafts and the other for supply of camshafts.

The appellant was submitting that the first transaction of assistance in the design and development of patterns is the activity of service by submitting that the overseas OEM engages the appellant and assigns it the responsibility to (i) assist in manufacturing process planning (ii) designing and developing the tool (iii) identify the third party manufacturers who can manufacture tools based on the drawings/designs/patterns for the manufacture of camshafts (iv) engage the third party vendors to manufacture the tools (v) use such tools for the manufacture of camshafts. It was submitted that though the pattern is in physical form, it is a composite supply where service is the principal supply.

The ld. AAR accepted the contention of the appellant that the transaction is the supply of service but held that it is an intermediary service. In this respect, in appeal, abundant material in the form of submissions is provided with the meaning of composite supply and others. The appellant explained the concept of supply of service.

Elaborate submissions were made before the ld. AAAR about the nature of the transaction.

The ld. AAAR summarized the position as under:

“11. As per the submission made by the appellant, it is the appellant who prepares the drawing and designs of tool / pattern and also check feasibility of its manufacturing. The techno-commercial offer is being made by the appellant to overseas OEM / Machinist. Overseas OEM / Machinist releases the purchase order, for a specific number of units of tools, after approval of techno-commercial offer. The appellant undertakes in-house drawing, design, modelling, simulation and documentation for the manufacture of the tools. Whereas, it hires third-party vendor for machining (manufacturing) the tool as per the specification provided by the appellant. The third-party vendors charge for the manufacture of tools, which is paid by the appellant. The third-party vendor delivers the tool to the appellant, of which the appellant further raises the supply invoice to overseas OEMs / Machinist specifying therein the description of goods (tools), quantity, rate per unit, etc. However, as industry practice in this sector, the appellant keeps such tools with it for further use in the manufacture of camshafts.

12. The invoice raised by the appellant also exhibits that the tools of specific designs as per the specifications of overseas customers are supplied to them. Thus, from a perusal of the purchase order placed by the overseas customers and supply invoice raised by the appellant, it is clear that the dominant intention of overseas customers is to get the supply of manufactured patterns / tools from the appellant as per the specification provided by them.”

The ld. AAAR further found that the appellant is making such a supply of tools on his own against consideration which is the price for tools, hence, there is no issue of receiving commission from overseas customers. The ld. AAAR also observed that the appellant is not facilitating any supply between the overseas entity and a third-party vendor. The impugned transaction is a supply of goods i.e., tools from appellant to customer on a principal-to-principal basis, observed the ld. AAAR. Accordingly, the ld. AAAR held that order of ld. AAR holding the above activity as an intermediary service is erroneous and cannot be accepted.

The ld. AAAR further observed that the appellant first manufactures the tools as per the requirements and specifications given by the customer and it retains them for use in the manufacture and supply of camshafts to said customer. The ld. AAAR observed that the appellant raised the tax invoice for these tools in the name of an overseas customer in convertible foreign exchange, though the tools are not physically exported to the customer and the ownership of the tools remains with the overseas customer. Therefore, the ld. AAAR held that the impugned transaction between the appellant and overseas customer is of supply of goods i.e., supply of pattern / tool of specified specifications.

The ld. AAAR modified AR accordingly, holding the transaction as a supply of goods.

12 Exemption — liability to RCM
M/s. Portescap India Pvt. Ltd.
(AR Order No. MAH/AAAR/DS-RM/15/2022-23
dated 13th January, 2023 (MAH)

The appellant is engaged in the manufacturing of customized motors in India and it is a SEZ Unit.

The appellant procures Rental Services from “Santacruz Electronics Export Processing Zone” (hereinafter referred to as “SEEPZ”) SEZ Authority, situated at SEEPZ service centre building, Andheri East, Mumbai-400096. Additionally, other services like Advocate Services and Gate Pass Services from SEEPZ are being procured wherein GST is presently being discharged by the appellant under the Reverse Charge Mechanism.

As per the Notification No. 18/2017 – Integrated Tax (Rate) dated 05th July, 2017, the Central Government exempts services imported by a unit or a developer in the Special Economic Zone for authorized operations, from the whole of the integrated tax leviable thereon under section 5 of the IGST Act.

The appellant understood that the exemption to allow tax-free procurement of goods and services for authorized operations.

The appellant filed an application for AR before ld. AAR is raising the following questions:

“(i) Whether an SEZ unit is required to comply with the reverse charge mechanism as a service recipient for local/domestic renting of immovable property services procured by the unit from SEEPZ Special Economic Zone Authority (Local Authority) in accordance with Notification No. 13/2017 – Central Tax (Rate) dated 28th June, 2017 read with Notification No. 03/2018 — Central Tax (Rate) dated 25th January, 2018?

(ii) Whether an SEZ unit is required to pay tax under the reverse charge mechanism on any other services in accordance with Notification No. 13/2017 — Central Tax (Rate) dated 28th June, 2017 read with Notification No. 03/2018 – Central Tax (Rate) dated 25th January, 2018.”

Vide order in GST-ARA-93/2019-20/B-110 dated 10th December, 2021. The ruling was given as under:

This appeal is against the above advanced ruling.

In appeal, the appellant mainly raised ground that Reverse charge in terms of Notification No. 13/2017 — Central Tax (Rate) dated 28.06.2017 read with Notification No. 03/2018 — Central Tax (Rate) dated 25.01.2018 and Notification No 10/2017 — Integrated Tax (Rate) dated 28th June, 2017 (hereinafter referred to as “reverse charge notification”) is not applicable in the case of a SEZ Unit and there ought to be a harmonized reading of the aforesaid reverse charge notifications issued under Section 9(3) of the CGST Act 2017, or Section 5(3) of the IGST Act 2017 with the provisions of Section 16(3) of the IGST Act 2017.

The appellant further submitted that a supply to SEZ will be considered as an inter-state supply and as long as the same supply is used for authorized operations of the SEZ, the same will be zero-rated. Further, it was submitted that as a recipient of supplies made by DTA to SEZ, the appellant is entitled to the option available under Section 16 of IGST Act 2017, for zero-rated supplies, to provide a LUT for the supplies received from the SEEPZ SEZ and used for the authorized activities of the SEZ. Therefore, it was contended that, the appellant is not required to make cash payment under reverse charge but receive supplies on the basis of an LUT at its option.

The appellant relied upon on the judgment in GMR Aerospace Engineering Limited and another versus Union of India and others (2019 (8) TMI 748 — 2019-VIL-489-TEL-ST) in support of the contention that the SEZ Act — Section 51 has an overriding effect.

The appellant, alternatively submitted that, even if it is assumed that “reverse charge” notifications asaforesaid are applicable, even then the SEZ unit in terms of Section 16 of the IGST 2017 could exercise the option to provide LUT as provided in respect of supplies made from DTA to an SEZ unit specified under Section 16(3) of the IGST Act 2017 and therefore, no liability to deposit RCM in cash.

The ld. AAAR made reference to relevant provisions including in section 16(1) of the IGST Act and reproduced the said section as under:

“16. (1) “zero rated supply” means any of the following supplies of goods or services or both, namely:

(a) export of goods or services or both; or

(b) supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit.”

The ld. AAAR on perusal of the aforesaid provisions of the zero-rated supply, observed that any supply of goods or services or both made to a SEZ developer or SEZ unit for carrying out authorised operation in SEZ will be considered as zero-rated supply and the said supply will not attract any GST whatsoever. The ld. AAAR observed that this provision of zero-rated supply will cover even the supply of services which are specified under the reverse charge Notification 10/2017-I.T. (Rate) dated 28th June, 2017 as amended by Notification No. 03/2018-I.T. (Rate) dated 25th January, 2018. The ld. AAAR, in this respect, referred to the principle of law that the specific provision made in the Act will have greater legal force than that of a notification issued under the same or any other provisions of the same Act. Accordingly, the ld. AAAR held that the provisions laid down under section 16(1) of the IGST Act, 2017 will supersede the notification issued under section 5(3) of the IGST Act, 2017, which enumerates the services which attract GST under a reverse charge basis. The ld. AAAR also observed that the said provision of section 16(1), merely mentions the supply of goods or services or both to the SEZ developer or SEZ unit and it does not mention anything about the type of the supplier. Therefore, irrespective of fact whether the supplier supplying the services is located in DTA or in SEZ area, as long as the supply is being made to SEZ developer or SEZ unit for carrying out authorized operations in SEZ, the same will be treated as zero-rated supply, and will not be subject to GST. Therefore, the ld. AAAR held that in the present case, the impugned services of renting immovable property being provided by the SEZ developer, i.e., SEEPZ SEZ to the appellant and not by a supplier located in DTA does not make any difference.

Referring to provisions of section 16 (1) and Section 5 (3) of the IGST Act, the ld. AAAR held that the intention of the legislature is not to tax the supplies made to a unit in SEZ or an SEZ developer, which has been made zero-rated under clause (b) of section 16 (1) of the IGST Act, 2017. It is further observed that by virtue of deeming provision under section 5 (3) of the IGST Act, 2017, the levy on procurement of services specified in Notification 13/2017 CT (Rate) falls upon the unit in SEZ or SEZ developer and therefore, a unit in SEZ or SEZ developer can procure such services for use in authorized operation without payment of integrated tax provided the actual recipient i.e., SEZ unit or SEZ developer, furnishes a LUT or bond as specified in condition (i) of para 1 of notification No. 37/2017-CT. The ld. AAAR opined that the actual recipient here for the subject supplies is a deemed supplier for the purpose of the aforesaid condition and the appellant will not be required to pay any GST under RCM on the impugned supply of renting of immovable property services received from SEEPZ SEZ, if appellant furnishes LUT.

The ld. AAAR further extended above principle in relation to service obtained by SEZ unit from DTA unit and held that the supply of services procured by SEZ unit from the suppliers located in DTA for carrying out the authorized operation in SEZ will not attract any GST in accordance with the provision of section 16(1) of the IGST Act, 2017, and the Appellant will not be required to pay any GST under RCM on the services received from DTA supplier for carrying out the authorized operation in SEZ, subject to LUT.

Accordingly, the ld. AAAR modified the AR as under:

“43. We, hereby, set aside the Advance Ruling No. GST-ARA-93/2019-20/B-110 dated 10th December, 2021– 2021-VIL-464-AAR, passed by the MAAR and held as under:

(i) that the Appellant is not required to pay GST under RCM on the impugned services of renting immovable property services received from SEEPZ SEZ for carrying out the authorized operation in SEZ subject to furnishing of LUT or bond as a deemed supplier of such services;

(ii) that the Appellantis not required to pay GST under RCM on any other services received from the suppliers located in DTA for carrying out the authorized operation in SEZ subject to furnishing of LUT or bond as a deemed supplier of such services.”

13.ITC of payment of BCD, CVD and SAD
M/s. Vijay Flexi Packaging Industries (AR Order No. 106/AAR/2023 dated 5th September, 2023 (TN)

In the AR the applicant has stated that they are a partnership concern engaged in the manufacture of printed poly packing materials. During 2011 they imported certain machinery under the EPCG Scheme and availed concessional duty benefits under the EPCG Scheme for the import of capital goods under an Authorization letter issued by Asst. Director General of Foreign Trade, Madurai for a period of 8 years ending 2019. Due to unforeseen circumstances, they could not fulfil the export obligation under the EPCG scheme. Therefore, they have remitted the duty amount i.e., Basic Customs Duty (BCD), Countervailing Duty (CVD), and Special Additional Duty (SAD).

Based on the above, the issue raised before AR was about eligibility to ITC of payment made of BCD, CVD and SAD along with interest.

The ld. AAR referred to the definition of ‘input tax’ in section 2(62) of the CGST Act which reads as under:

“(62) “input tax” in relation to a registered person, means the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes—

(a) the integrated goods and services tax charged on the import of goods;

(b) the tax payable under the provisions of sub-sections (3) and (4) of section 9;

(c) the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act;

(d) the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective State Goods and Services Tax Act; or

(e) the tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union Territory Goods and Services Tax Act, but does not include the tax paid under the composition levy.”

The ld. AAR also observed that ‘input tax credit’ means the credit of input tax as defined in section 2(63) of the CGST Act as reproduced above. BCD, CVD and SAD are not covered by the above sections. The ld. AAR observed that the definition of Input tax and input tax credit as per Section 2 of the GST Act, 2017, includes only IGST charged on imports of goods and there is no provision under the GST Law for availing credit of BCD, CVD and SAD.

Accordingly, the ld. AAR passed a ruling that BCD, CVD and SAD are not eligible for ITC.

Erroneous Refund of Input Tax Credit – Whether Adjudication under section 73 / 74 Permissible?

INTRODUCTION

For a long time, taking the amount back from the government remained a challenging task for industry and professionals. The reason for the same is also apparent, no officer wants to take a chance for the disbursement of any amount from the government treasury, which is susceptible to be illegal or erroneous hence except for automated processing of refunds, the same is being sanctioned and disbursed with utmost care and only after due verification of eligibility criteria and relevant documents. Since refunds of Input Tax Credit (ITC) on account of exports or inverted duty structure are regular phenomena, the same are being applied by the taxpayer on a concurrent basis and sanctioned after due verification by departmental officers. However, after the department started the audit under section 65, one of the common observations of the audit was an erroneous refund of ITC sanctioned and disbursed to the taxpayer. Based on such audit observations, the department has now initiated proceedings under section 73 / 74 for recovery of the allegedly erroneous grant of ITC in several cases. This article attempts to examine the jurisdiction and validity of proceedings under section 73 / 74 for recovery of such refunds.

ADJUDICATION OF REFUND APPLICATION:

As far as the refund of ITC is concerned, the same is a statutory right which emanates from section 54(3). As per statutory provision, a refund of ITC can be claimed in two circumstances, firstly in the case of zero-rated supplies and secondly in the case of inverted duty structure. The procedure for the same is provided in Chapter X of the GST Rules. Rules 89 to 91 deal with procedures in relation to the filing of a refund application, its acknowledgement, and the provisional refund. Whereas rule 92 provides for adjudication of refund applications.

The bare reading of section 54(5), Rule 92(1) & (1A) signifies that before granting a Refund, the proper officer has to examine the refund application along with documentary and other evidence, and he has to apply his mind, whether a refund is payable or not. Moreover, if a proper officer finds that a refund is not payable, as per rule 92(3), it is necessary for the proper officer to give notice of this effect to the taxpayer and provide an opportunity to be heard before rejecting any such refund application. Accordingly, any decision to grant or reject any such refund is an adjudication order as per section 2(54) read with section 54 and Rule 92. Further, one may conclude that section 54 read with chapter X of CGST Rules, is a complete code in itself for regulating refunds. One may refer to the judgment of the Hon’ble Madras High Court in the case of Eveready Industries India Ltd. vs. CESTAT, Chennai 2016 (337) E.L.T. 189 (Mad.), whereby in similar circumstances and legal framework, the Hon’ble High Court observed as under:

28. But, a careful look at the scheme of Sections 11A, 11B and 35E would show that an application for a refund is not to be dealt with merely as a ministerial act or an administrative act. Under Section 11B of the Act, a person, claiming a refund of any duty of excise and interest already paid, should make an application in the prescribed form. Such application is to be made within the period of limitation prescribed under sub-section (1) of Section 11B. The application should be accompanied by such documentary or other evidence, in relation to which, such refund is claimed. Sub-section (2) of Section 11B mandates that upon receipt of any application for refund, the Assistant Commissioner or Deputy Commissioner, if he is satisfied that the duty is refundable, should make an order. The refund order is capable of being given effect in several methods including adjustment or rebate of duty of excise, all of which are prescribed in Clauses (a) to (f) under the Proviso to sub-section (2) of Section 11B.

30. Therefore, the detailed procedure prescribed under Section 11B not only regulates the manner and form, in which, an application for refund is to be made but also prescribes a period of limitation, and method of adjudication as well as the manner, in which, such refund is to be made. In simple terms, Section 11B is a complete code in itself.

31. Therefore, it is clear that what is required of an Assistant Commissioner or Deputy Commissioner under sub-section (2) of Section 11B is to adjudicate upon the claim for refund. The expression ‘Adjudicating Authority’ is also defined in Section 2(a) to mean any authority competent to pass any order or decision under this Act, but does not include the Central Board, Commissioner of Excise (Appeals) or the Appellate Tribunal. Hence, the power exercised under Section 11B is that of an adjudicating authority and the order passed is certainly one of adjudication.

By the above discussion, one may conclude that granting a refund under the GST law, more specifically ‘Refund of ITC’, is not mechanical computation only; rather it involves the application of mind by the proper officer, and is granted or rejected by the proper adjudication of refund application.

JURISDICTION UNDER SECTIONS 73 / 74:

Proceedings under sections 73 and 74 are identical, barring that section 73 applies to bonafide cases and section 74 applies to evasion cases. Hence, for brevity, relevant extracts of section 74 alone are reproduced hereunder for ready reference:

(1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilised by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty equivalent to the tax specified in the notice.”

From the perusal of section 74(1), one can identify that section 74 can be issued to recover demand in respect of five subject matters, i.e., when tax has been short paid, not paid, erroneously refunded, or when ITC has been wrongly availed or utilised. The same can be summarised in the following table for easy understanding:

In respect of Tax In respect of ITC
1) Tax has not been paid;

2) Tax has paid short-paid;

3) Tax has been erroneously refunded;

 4) ITC has been wrongly availed;

5) ITC has been wrongly utilised.

A bare perusal of Statutory Provision reveals that section 74, with respect to tax demand, can be invoked if tax has not been paid, short paid, or erroneously refunded. On the other hand, the invocation of section 74 with respect to Input Tax Credit can be there for wrongful availment or utilisation.

Statutory Provisions does not authorise invocation of section 73 / 74 whereby the allegation is of erroneous refund of Input Tax Credit. Accordingly, in the humble opinion of the author, section 73 / 74 doesn’t confer jurisdiction to any officer to initiate proceedings under section 73 / 74 for recovery of the alleged erroneous refund of input tax credit.

REMEDY AGAINST ERRONEOUS REFUND OF ITC:

Once it is discussed that there is no jurisdiction under section 73 / 74 for such recovery, the obvious question comes to mind: what remedy does the department have in case of grant of any erroneous refund of the input tax credit?

Once any adjudication order is passed, the statute provides the following remedial measures against an order, depending upon the facts and circumstances of the case:

i. Section 107: Appeal to First Appellate Authority:

When the department is of the opinion that the order or decision of refund is legibly not correct or inappropriate, an appeal under section 107(2) may be filed against such decision.

ii. Section 108: Revision:

When revisional authority is of the opinion that the order or decision of refund is erroneous in so far as it is prejudicial to the interest of revenue and is illegal or improper or has not taken into account certain material facts, the Revision under section 108 can be initiated.

iii. Section 161: Rectification

When the proper officer (one who sanctioned the refund) finds that there is any error which is apparent on the face of records, the officer may take recourse to section 161 and rectify the order on its own.

Hon’ble Allahabad High Court examined the identical issue in the case of Honda Siel Power Products vs. Union of India [2020 (372) ELT 30 (All)], whereby the Hon’ble High Court held that once the adjudication has taken place under section 11B, the department cannot proceed to recover on the basis of “erroneous refund” under section 11A so as to enable the refund order to be revoked, as the remedy lied under section 35E for applying to the Appellate Tribunal for determination and not invoking section 11A.

Recently, this issue under GST law has been raised before the Hon’ble Rajasthan High Court in the case of Saars Construction vs. Chief Commissioner of State Tax, Jaipur & Others [DB CWP No. 4398/2024, Dt. 18th April, 2024], whereby Hon’ble High Court appreciated and was pleased to stay proceedings initiated through a show cause notice under section 73 for recovery of refund of ITC and observed as under:

Taking into consideration the submission of learned counsel for the petitioner that proceedings by way of impugned show cause notice could not be drawn unless an order of refund granted under Section 54, sub-section (3) of the Rajasthan Goods and Services Tax Act, 2017 (for short ‘the Act’) is reversed either in an appeal under Section 107 of the Act or in revision under Section 108 of the Act by the competent authority under the law, further proceedings pursuant to impugned show cause notice shall remain in abeyance.

Even otherwise, initiation of adjudication under section 73 / 74 for an already granted refund of input tax credit shall amount to a review of adjudication already happened under section 54, for which GST law doesn’t have any enabling provision. It is a settled principle of law that power of review is not an inherent power and must be expressly provided under the law [Refer Commissioner of Central Excise, Vadodara vs. Steelco Gujrat Ltd. 2004 (163) ELT 403 (SC)]

CONCLUSION

Sanction and grant of refund of input tax credit happen through a complete adjudication process, whereby the proper officer, after application of mind, reaches a conclusion of granting of refund. Either of the aggrieved parties (i.e., taxpayer or the department) have remedies provided within law. In the humble opinion of the author, just because departmental authorities could not take appropriate statutory recourse timely, the fresh proceeding under section 73 / 74 cannot be initiated to recover the grant of alleged wrongful or erroneous refund of Input Tax Credit.

Service Tax

I. SUPREME COURT

2 (2024) 16 Centax 121 (S.C.) KantilalBhagujiMohite vs. Commissioner Of Central Excise And Service Tax, Pune-III dated 14th February, 2024

Payment of pre-deposit under section 35F of Central Excise Act, 1944 is mandatory for filling an appeal in CESTAT.

FACTS

Appellant initially filed an appeal with CESTAT. However, appeal was dismissed as petitioner did not submit mandatory pre-deposit, as per section 35F of Central Excise Act, 1944. Aggrieved by dismissal, petitioner filed a Writ Petition in Hon’ble High Court of Bombay alleging that appeal was dismissed without considering merits, thereby violating Article 14 and Article 19(1)(g) of Constitution of India. However, Hon’ble High Court also upheld dismissal. Hon’ble Bombay High Court had ruled that the right to file an appeal is a statutory-conditional right and compliance of it is mandatory. Being aggrieved by the rejection, Appellant filed a Special Leave Petition at Hon’ble Supreme Court.

HELD

Hon’ble Supreme Court decided not to interfere with the case and dismissed the petition without providing any further clarification.

II. TRIBUNAL

1 (2024) 16 Centax 169 (Tri. -Bang) Naveen Chava vs. Commissioner of Central Excise dated 30th January, 2024.

Non-compete clause cannot be separated from an agreement and taxed as Declared Service under section 66 E(e) of Finance Act, 1994.

FACTS

Appellant was engaged in the business of designing integrated sheets/circuit for telecom Industry. He entered into a business transfer agreement as going concern on slump sale basis. After this transaction an investigation was initiated by DGGI and SCN was issued alleging that the contract contains a “non-compete” clause. According to which, appellant was prohibited from engaging in any business similar to the onebeing transferred, for a duration of two years. SCN classified this clause as a Declared Service under section 66(E)(e) of Finance Act, 1994 and demanded tax on such basis. Subsequently, an order was issued which confirmed demand along with penalty. Being aggrieved by impugned order, petitioner filed this appeal before Tribunal.

HELD

Tribunal observed that “non-compete” clause was general in nature and there was no ‘consideration’ involved in the agreement to quantify non-compete clause as service. As a result, it was squarely covered under mega exemption list of service tax. Court further relied on GST Circular No.178/10/2022, which clarified that unless payment was made for tolerating an independent act, it will not qualify as ‘consideration’. Accordingly, appeal was allowed, and impugned order was set aside.

Goods And Services Tax

HIGH COURT

5 (2024) 17 Centax 88 (Mad.) Thai Mookambikaa Ladies Hostel vs. Union of India dated 23rd March, 2024

Entry granting exemption to “residentialdwelling” under Notification No. 12/2017-Central Tax (Rate), squarely covers hostel provided for working women and girl students for residential purposes.

FACTS

Petitioner was engaged in the business of renting out a hostel for working women and girl students for residential use. Petitioner filed an application for Advance Ruling seeking clarification as to whether hostels are eligible for exemptions under Notification No. 12/2017-Central Tax (Rate), Entry no. 12: “Services by way of renting of residential dwelling for use as a residence”. However, AAR and AAAR propounded a negative ruling. Being aggrieved by such rejection, he filed a writ petition under Article 226.

HELD

Hon’ble High Court relied upon the conclusion arrived in the judgement of Taghar Vasudeva Ambrish vs. Appellate Authority for Advanced Ruling, Karnataka 2022 (63) G.S.T.L. 445 (Kar.), wherein it was held that hostels exclusively serving working women and girl students for residential purposes are under the ambit of a residential dwelling and is eligible for exemption. Further, the Court also clarifiedthat the recognition of “residential dwelling” cannot be denied just because the service provider was not providing an area for washing, cooking etc. Accordingly, the Advance Ruling was quashed, and the exemption was allowed.

6 (2024) 16 Centax 161 (Del.)AnhadImpex vs. Assistant Commissioner Ward 16 Zone 2 Delhi dated 16th February, 2024.

Uploading of Show Cause Notice (SCN) on the GST portal under the tab “Additional Notices and Orders” instead of “View Notices and Orders” will be considered inadequate intimation.

FACTS

The petitioner was issued an order under section 73 of the CGST Act, whereby a demand was created against the petitioner. Typically, show cause notices were issued via the portal under the tab labelled “View Notices and Orders.” However, in this instance, the petitioner received notice under the tab “Additional Notices and Orders.” Due to this misplacement, the petitioner was unable to reply to SCN and consequentially, an impugned order was issued. Aggrieved by it, the petitioner filed a Writ Petition at the Hon’ble High Court, pleading that he should be given an opportunity to be heard.

HELD

Hon’ble High Court observed that the issue arose due to the complexity of the GST web portal and held that inadequate intimation was provided to the petitioner as SCN was wrongly placed under the tab “Additional Notices and Orders” instead of “View Notices and Orders”. Accordingly, the impugned order was quashed, granting the petitioner an opportunity to respond to SCN.

7 (2024) 16 Centax 354 (Cal.) Jayanta Ghosh vs. State of West Bengal dated 05th March, 2024

Denying an appeal on the grounds of limitation, without providing an opportunity of being heard, is a violation of natural justice.

FACTS

The petitioner was issued an SCN under section 74 of the WBGST Act, demanding payment of tax. However, the column for date, time, and venue in SCN was left blank. Further, no opportunity for a personal hearing was granted to the petitioner. The petitioner challenged impugned order based on a violation of natural justice but was denied any relief from appellate authority. Being aggrieved by impugned order passed by respondent, petitioner preferred this petition before Hon’ble High Court.

HELD

Hon’ble High Court held that, respondent violated principle of natural justice by not providing opportunity of hearing to petitioner. Accordingly, impugned order was set aside, and respondent was ordered to give an opportunity of personal hearing to petitioner.

8 (2024) 16 Centax 330 (All.) RidhiSidhi Granite and Tiles vs. State of U.P. dated 01st March, 2024

The penalty cannot be levied due to a technical error regarding the address of the consignee in the e-way bill.

FACTS

The appellant was transporting goods along with an E-Way Bill which had an error regarding the address of the consignee. However, there were no other issues with the said consignment. The vehicle carrying the petitioner’s goods was intercepted by the respondent and subsequently, an order was passed directing the appellant to pay penalty since the e-way bill was improper. Later, the order was also confirmed by the Appellate Authority. Being aggrieved, the appellant preferred a writ petition before the Hon’ble High Court.

HELD

It was held that imposition of tax is only on the basis of a technical error with regards to the wrong address and no mens rea for evasion of tax could have been proved by the department. Accordingly, the amount deposited by the petitioner was refunded and other reliefs were granted.

9 (2024) 15 Centax 350 (All.) Nokia Solutions and Networks India Pvt. Ltd. vs. State of U.P. dated: 06th February, 2024

The penalty cannot be levied solely for the non-completion of Part B of the e-way bill.

FACTS

Petitioner received an SCN under section 74 of CGST Act for generating incomplete e-way bills without filling out Part-B, allegedly with malicious intent. During transportation of petitioner’s goods between Delhi and Meerut, vehicle carrying it was intercepted for incomplete e-way bill. Upon interception, petitioner promptly rectified the deficiency by reissuing e-way bills. However, despite correction, detention order was passed and the assessing officer raised a demand with a penalty. Further, an appeal was filed but was rejected on similar grounds. Aggrieved with this decision, the petitioner filed this writ petition before the Hon’ble High Court.

HELD

Hon’ble High Court held that there was no material record to show that any mens rea to evade taxes existed on behalf of the petitioner. The court further noted that the respondent’s presumption that the distance between Delhi and Meerut, which is 75 kilometres will allow the petitioner to make multiple trips and evade tax is merely based on surmises and conjectures. Accordingly, the impugned order was set aside.

10 A Fortune Trading Research Lab LLP vs. Additional Commissioner (Appeals I) [2024] 159 taxmann.com 780 (Madras) dated 16th February, 2024.

In the case of the Export of service, merely because receipts are routed through an intermediary like PayPal and credited to the assessee service provider’s account in Indian currency ipso facto would not mean that the assessee has not exported services within the meaning of section 2(6) of IGST Act, 2017.

FACTS

The petitioner is engaged in the business of providing online services through its website www.tradingwiser.com. Users visiting its website subscribe to plans as given and make payments. The payment was collected by the intermediary named ‘PayPal’ on behalf of the petitioner. Then the said payment was deposited in the petitioner’s account in Indian rupees by complying with all the RBI regulations. The petitioner treated the said services under the “export of service” / “zero-rated supply”.

The petitioner filed a refund claim for the export of services which was rejected by the department based on the ground that the export proceeds received in Indian rupees, were not in accordance with RBI directions.

HELD

The Hon’ble Court observed that, as an intermediary, PayPal receives the amount in a convertible foreign exchange in its account and directly credits the same into the assessee’s account in Indian currency in accordance with provisions of Foreign Exchange Management (Manner of Receipt and Payment) Regulations. TheCourt referred to Regulation 3 of the said regulationsand held that if payments are routed through an intermediary to a person like the petitioner, the intermediary should be an authorised person to receive such payment in convertible foreign exchange. As an intermediary, PayPal is required to only credit the amounts in convertible foreign exchange to the Reserve Bank of India. Consequently, the condition of receipt of consideration in foreign exchange is satisfied and hence the petitioner is eligible for a refund.

11 Mansoori Enterprises vs. Union of India [2024] 160 taxmann.com 261 (Allahabad)  dated 23rd February, 2024.

Orders passed by the Central officer should be within the Jurisdictional limits as mentioned in Circular No.31/05/2018-GST dated 9th February 2018. Any order passed by the Central Tax Officer exceeding the above limits is liable to be quashed.

FACTS

In the instant case, the order was passed by the superintendent against the assessee disallowing the input tax credit under section 73 of the CGST Act involving the amount of ₹16,00,000. The appellant challenged the order on the ground that the superintendent does not have jurisdiction to pass the said order citing a circular No.31/05/2018 GST dated 9th February, 2018 issued by the Government of India, Ministry of Finance, Department of Revenue, according to which the superintendent’s jurisdiction was limited by the said circular to matters not exceeding ₹10,00,000.

HELD

The Hon’ble Court quashed the orders accepting Assessee’s plea of lack of jurisdiction to pass the order relying upon the said Circular.

12 Tvl. Vardhan Infrastructure vs Special Secretary, Head of the GST Council Secretariat, New Delhi. [2024] 160 taxmann.com 771 (Madras) dated 11th March, 2024.

If an assessee has been assigned administratively to the Central Authorities, pursuant to the decision taken by the GST Council as notified by Circular No.01/2017 bearing Reference F.No.166/CrossEmpowerment/GSTC/2017 dated 20th September, 2017, the State Authorities have no jurisdiction to interfere with the assessment proceedings in absence of a corresponding Notification under section 6 of the respective GST Enactments. Similarly, if an assessee has been assigned to the State Authorities, under the said Circular, the officers of the Central GST cannot interfere although they may have such intelligence regarding the alleged violation of the Acts and Rules by an assessee.

FACTS

The short issue before the Hon’ble High Court was whether the petitioners who are assigned to either the Central Tax Authorities or the State Tax Authorities under the respective Central Goods and Services Tax Act, 2017 (CGST Act) and/or Tamil Nadu Goods and Services Tax Act, 2017 (SGST Act) can be subjected to investigation and further proceeding by the counterparts under the respective GST Enactments.

The petitioners submitted that in the absence of a proper Notification under section 6 of the respective GST Enactments for cross-empowerment, the impugned proceedings by the respective counterparts were without jurisdiction.

HELD

The Hon’ble Court observed that under the present Act, the delegation only is to the officers under the respective GST Enactments, unlike in section 6 of the Model GST Laws which contemplated wide powers with the Board/Commissioner under the respective Model GST Laws to delegate the powers to officers from their counterpart department. Further, section 6 of the respective Central GST Act, 2017 and SGST Act, 2017 which are relevant for cross-empowerment read slightly differently from section 7 of the respective Model Central and State GST laws which were in circulation in February 2016. The Hon’ble Court held that section 6(1) of the respective GST Enactments empowers the Government to issue notification on the recommendation of the GST Council for cross-empowerment. However, no notification is issued under section 6(1) of the respective GST Enactments except for a refund.

In this background, the Hon’ble Court held that the manner in which the provisions have been designed is to ensure that there is no cross-interference by the counterparts as no notifications have been issued for cross-empowerment with the advice of the GST Council, except for the purpose of refund of tax under Chapter-XI of the respective GST Enactments read with Chapter X of the respective GST Rules and consequently, the impugned proceedings are to be held without jurisdiction. The Court held that the officers under the State or Central Tax Administration as the case may be cannot usurp the power of investigation or adjudication of an assessee who is not assigned to them and that the proceedings should be initiated by the Authority to whom they have been assigned for the purported loss of Revenue under the respective GST Enactments.

13 Otsuka Pharmaceutical India (P.) Ltd vs. Union of India [2024] 161 taxmann.com 368 (Gujarat) dated 07th March, 2024.

The requirement for submitting a certified copy of the order is insignificant if the said order is available online. The amendments to Rules 108 and 109 being clarificatory are retrospective

FACTS

The petitioner for the period in question exercised the option of exporting goods without payment of tax and seeking a refund of unutilised input tax credit. However, the adjudicating authority without considering the petitioner’s reply passed an order rejecting the refund.

Aggrieved by the same, the appellant preferred an appeal online under section 107 of the CGST Act. The petitioner was thereafter called upon to submit the certified copies of the Order-in-Original. The petitioner submitted such copies during the pendency of the appeal, however, the appellate authority, relying upon sub-rule (3) of Rule 108, calculated the period of delay by observing that the petitioner failed to submit a certified copy of the decisions or orders within the period as stipulated under Rule 108 of the Rules and considered the same delay as an inordinate delay ranging from 71 days to 106 days and declined to entertain the appeals on the ground of delay.

HELD

Amendment in Rule 108 and Rule 109 provided that when an order which was appealed against was issued or uploaded on a common portal and same could be viewed by the appellate authority, the requirement of submission by the assessee of a certified copy of such uploaded order to vouch for its authenticity would be insignificant in view of the availability of order online. The amendment had a retrospective effect as the same was clarificatory in nature and therefore, the impugned order passed by the appellate authority rejecting the appeal on the ground of delay would not survive. The Hon’ble Court accordingly, quashed the impugned order and the matter was remanded back to the appellate authority.

14 Chetan Garg vs. Avato Ward 105 State Goods and Service Tax [2024] 161 taxmann.com 468 (Delhi) dated 05th April, 2024.

An application seeking cancellation of GST registration cannot be rejected merely because there is a pendency of show cause proceedings as the proceedings under DRC-01 are independent of the proceedings for cancellation of GST registration and could continue despite the cancellation of GST registration.

FACTS

The Petitioner filed an application dated 31st October, 2023 seeking cancellation of GST registration on the ground that the Petitioner does not intend to carry on the business under the said GST number. The said application was rejected by the department on the ground that certain show cause notices were issued to the assessee for financial years 2018–19 to 2023–24. Aggrieved by the same, the petitioner filed this petition.

HELD

The Hon’ble Court held that the proceedings under DRC-01 are independent of the proceedings for cancellation of GST Registration and can continue despite the cancellation of GST registration. The recovery of any amount found due can always be made irrespective of the status of the registration. Thus, merely the pendency of the DRC-01 cannot be the grounds to decline the request of the taxpayer for cancellation of the GST Registration. The Hon’ble Court thus directed that the GST Registration of the petitioner would be treated as cancelled with effect from the date from which the petitioner sought cancellation of GST registration.

15 Comfort Shoe Components vs. Asst. Commissioner [2024] 161 taxmann.com 316 (Madras) dated 29th November, 2023.

The period of 30 days for filing of return after service of best judgment assessment order under section 62 of the CGST Act is directory in nature and tax authorities have the power to condone the delay in filing of the returns beyond the period of 30 days depending upon the facts of each case.

FACTS

The petitioner was not able to file their returns for the months of December 2022, January 2023 and February 2023 within the prescribed time limit. Hence, the jurisdictional officer passed the best judgement assessment orders, in terms of the provisions of section 62(1) of the Goods and Services Tax Act, 2017. Thereafter, the petitioner had taken steps and filed the returns for the said months. However, due to financial difficulties faced by the petitioner, the returns were filed after a period of 30 days from the date of service of the assessment order. The petitioner therefore approached the High Court to condone the delay and direct withdrawal of the assessment orders.

HELD

The Hon’ble Court held that under section 62 of the CGST Act, the adjudicating officer can make the order within 5 years from the date specified under section 44 of the Act for furnishing the annual return for the financial year, in which the tax was not paid. Hence, when the best judgment assessment order has been made at the earliest point of time, the legal right of the petitioner to file the returns, which is available under section 62 of the Act, cannot be taken away. Hence, the limitation of 30 day period prescribed under section 62(2) of the Act appears to be directory in nature and if an assessee was not able to file his returns for any reasons, that are beyond his control, certainly the said delay can be condoned by the tax authority and if he is satisfied, the assessee can be permitted to file the returns after payment of interest, penalty and other charges as applicable.

16 FayizNangaparambil vs. UOI [2024] 160 taxmann.com 441 (Delhi) dated 05th March, 2024.

The expression “shall be passed within 30 days” used in Rule 22(3) of the Rules for passing the order of cancellation of registration is not mandatory but is only a directory as there is no such stipulation of an automatic forfeiture of the right to pass an order with regard to the non-compliance of the timeline provided by Rule 22(3) of the Rules.

FACTS

Petitioner impugned the Show Cause Notice dated 22nd June, 2023 issued by the Respondent, whereby the GST registration of the petitioner was suspended from 22nd June, 2023 and he was called upon to show cause as to why the said registration should not be cancelled. On 27th June, 2023 , the petitioner filed a detailed reply to the said show cause notice, along with proof of additional place of business and also contended that the impugned notice was issued based on ex-parte physical verification of the business place, which is contrary to Rule 25 of the Central Goods and Service Tax Rules, 2017. Before the Hon’ble Court, the petitioner contended that even after a lapse of 30 days of filing the reply, the impugned SCN is pending adjudication and hence as per Rule 22(3) of the CGST Rules, the show cause notice is deemed to have been lapsed and cannot be adjudicated upon. The issue before the Hon’ble Court was therefore whether the period of 30 days provided in Rule 22(3) for the passing of the order of cancellation is a mandatory period and whether after the expiry of the said period, the officer’s right to pass the order of cancellation is forfeited.

HELD

The Hon’ble Court, referring to the decision in the case of May George vs. Tahsildar [2010] 13 SCC 98 held that in order to declare a provision mandatory, the test to be applied is as to whether non-compliance with the provision could render the entire proceedings invalid or not. Whether the provision is mandatory or directory, depends upon the intent of the legislature and not upon the language for which the intent is clothed. The issue is to be examined having regard to the context, subject matter and object of the statutory provisions in question. The Court may find out as to what would be the consequence which would flow from construing it in one way or the other and as to whether the statute provides for a contingency of the non-compliance with the provisions and whether the non-compliance is visited by a small penalty or a serious consequence would flow therefrom and as to whether a particular interpretation would defeat or frustrate the legislation and if the provision is mandatory, the act done in breach thereof will be invalid. The Hon’ble Court noted that there is no consequences provided in the said rule with regard to non-passing of an order within 30 days, which is an indicated factor as to the intention of the legislature. It further noted that Rule 22 (3) of the Rules refers to two separate proceedings. One is initiated by the taxpayer by submitting an application seeking cancellation of registration and the other by the proper officer by issuance of show cause notice for cancellation of the registration. The timeline provided for the issuance of an order is 30 days for both proceedings. If the intention was that the proper officer would forfeit the right to pass an order, then an anomalous situation would arise with regard to proceedings where the taxpayer voluntarily applies for cancellation. If the proper officer, qua the said proceedings, also forfeits the right to issue an order, after the lapse of 30 days, then the application seeking cancellation would be deemed to be rejected and the taxpayer would continue to remain registered despite his desire to seek cancellation of registration.

In light of the aforesaid reasoning, the Hon’ble Court held that the expression “shall issue an order” used in Rule 22(3) of the Rules cannot be construed as mandatory for proceedings under Rule 21 and is directory for proceedings under Rule 20.

 

Recent Developments in GST

A. NOTIFICATIONS

1. Notification No.07/2024-Central Tax dated 8th April, 2024

The above notification seeks to provide waiver of interest for a few specified registered persons for specified tax periods, (as listed in the Notification). It is regarding delay in filing returns due to technical glitches.

2. Notification No.08/2024-Central Tax dated 10th April, 2024

By Notification No. 04/2024-CT dated 5th January, 2024, the special procedure to be followed by registered person engaged in manufacturing of certain goods mentioned in the notification like Pan Masala and tobacco products was prescribed w.e.f. 1st April, 2024. The date for implementation is extended till 15th May, 2024.

B. ADVISORY / INSTRUCTIONS

(a) Instruction no.1/2023-24-GST dated 30th March, 2024 is issued which is regarding guidelines for CGST field formations in maintaining ease of doing business while engaging in Investigation with regular taxpayers.

(b) Advisory dated 3rd April, 2024 is issued about Self-Enablement for e-invoicing.

(c) Advisory dated 9th April, 2024 is issued about Reset and Re-filing of GSTR-3B for some taxpayers. This facility is applicable when there are discrepancies between the save data and actually filed data.

(d) Advisory dated 9th April, 2024 is issued about Auto-population of HSN-wise summary from e-Invoices into Table 12 of GSTR-1.

(e) Advisory dated 11th April, 2024 is issued informing about recommendation for extension of GSTR-1 due date from 11th April, 2024 to 12th April, 2024.

C. ADVANCE RULINGS

6 Sale of Land vis-à-vis Construction Service

M/s. NBER Developers LLP (AR Order No.03/ODISHA-AAR/2023-24 dated 12th December, 2023 (Odisha)

The Applicant has sought for an advance ruling with regard to “Applicability of GST rate” on sale of Land and Duplex constructed on same land on execution of two separate Agreements and whether input tax credit is admissible.”

The facts are that the applicant is engaged in the business of Real Estate & Construction. The applicant is going to enter into two separate agreements with its customers; one for sale of land and other for construction of residential duplex over the same land. It has been submitted that the duplexes are not “affordable residential apartment.”

The applicant submitted that as per Schedule III of the CGST Act, sale of land shall be treated neither as a supply of goods nor as a supply of service. Hence it was contended that GST is not applicable on sale / transfer of land. For the said purpose the Applicant has referred to Circular No. 177/09/2022-TRU Dated: 3rd August, 2022 in which certain clarifications are given as under.

“14. Whether sale of land after levelling, laying down of drainage lines etc., is taxable under GST –

14.1 Representation has been received requesting for clarification regarding applicability of GST on sale of land after levelling, laying down of drainage lines etc.

14.2 As per SI (5) of Schedule III of the Central Goods and Services Tax Act, 2017, ‘sale of land’ is neither a supply of goods nor a supply of services, therefore, sale of land does not attract GST.

14.3 Land may be sold either as it is or after some development such as levelling, laying down of drainage lines, water lines, electricity lines, etc. It is clarified that sale of such developed land is also sale of land and is covered by Sr. 5 of Schedule III of the Central Goods and Services Tax Act, 2017 and accordingly does not attract GST.

14.4 However, it may be noted that any service provided for development of land, like levelling, laying of drainage lines (as may be received by developers) shall attract GST at applicable rate for such services.”

The Applicant canvassed that both of his contracts should be treated separately. It was clarified that once the customer enters into a contract for purchase / sale of land and land is registered in his name, the customer becomes the owner of the land and he has no obligation / binding to get his house constructed from the same developer. It was further submitted that separate approval needs to be taken from concerned authorities for construction of individual houses and hence it is separate contract. It was further clarified that a developer starts development of a land into plotting and other development activities like electricity, drainage, water facilities, parks, club house etc. and he may enter into sale agreements with the prospective buyers either before commencement of such development or during the course of such development or after development is completed. However, it being sale of land, not liable to GST read with Circular 177 referred to above, submitted the applicant.

For above purpose certain other advance rulings were referred in which sale of developed plots are held as sale of land and not liable to GST.

Regarding the construction on land so sold, the applicant expressed his opinion that the said contract is purely in the nature of “works contract” as defined in section 2(119) and thus 18 per cent GST will be payable on the consideration amount of works contract with eligible tax credit for the expenses incurred in relation to the works so executed.

The ld. AAR went through the records / documents and found that Arnav Constructions, a partnership firm is the owner of the land in question and it has executed a General Power of Attorney in favour of NBER Developers (applicant), represented through its designated partner Mr. Chetan Kumar Tekriwal for commercial exploitation of the land in question. The relevant clauses of the Power of Attorney are also reproduced in AR. The clauses mandate the applicant to get building plans approved for Multi Storied Building, duplexes from concerned Government Authority.

The applicant is further required to apply for and obtain electricity, water, sewerage, drainage or other connections or any other utility / facility / amenities to the said Multi Storied building complex and for that purpose to sign, execute and submit all papers / documents and plans and to do all other acts, deeds and things as may be deemed fit and proper by the said Attorney.

It is also mentioned that the applicant can enter into agreements, with the intending purchasers regarding transfer of Flats / Units / Independent duplex houses by way of absolute sale and to take advances, consideration amount and / or construction cost as settled in respect of such Units and to grant proper receipts and discharge for the same.

The applicant is also authorised to negotiate for sale and transfer, let out charge or encumber land and building and / or Flats / Units / independent duplex houses, Parking spaces at its discretion and as he may deem fit and expedient.

Based on above terms the ld. AAR observed that the Applicant has procured land from the land owner M/s Arnav Constructions through General Power of Attorney for commercial exploitation of the land and i.e. towards construction of multi storied building complex/independent duplexes comprising of Units / Flats / Duplex Houses / Parking spaces. It was also seen that the land owner M/s Arnav Constructions is to receive 33 per cent of relevant super built area as the compensation of the land. In view of above, the ld. AAR observed that the land owner M/s Arnav Constructions has not authorised the applicant to sale land/plot; rather he is authorised to construct Duplex / Multi Storied buildings over the land in question.

It was also seen that the applicant is registered under RERA.

Considering totality of facts, the ld. AAR observed that the transaction between the applicant & its customers is a transaction not limited to the sale of plot / land only, but the applicant is also engaged in construction of duplex/multi storied flats for the customers on the same land.

The ld. AAR distinguished other ARs cited before it, as facts are different.

The ld. AAR passed following ruling.

“5.0 Q. Applicability of GST rate on sale of Land and Duplex constructed on same land on execution of two separate Agreements and whether input tax credit is admissible.

Ans: On conjoint reading of agreements & submissions made to the application, we are of the considered view that the activity undertaken / proposed to be undertaken by the Applicant towards sale of plot / land and construction of Duplex / Flats over the said land amounts to taxable service under GST in view of the Schedule II, Para 5 Clause (b) definition of the CGST Act. In view of Notification No. 03/2019-C.T. (Rate) dated 29th March, 2019, the Applicant is liable to pay GST @7.5 per cent (CGST @3.75 per cent+ SGST @3.75 per cent) after deducting 1/3rd towards land cost from the total consideration i.e. effective rate of 5 per cent GST on the full consideration received towards land and duplex and is not eligible for ITC on any inward supply of goods and services.”

7 Government vis-à-vis Governmental Authority

M/s. Ramesh Kumar Jorasia (Muskan Construction) (AR Order No. RAJ/AAR/2023-24/09 dated 31st August, 2023 (Raj)

The applicant, M/s Muskan Construction, has been awarded a contract by Jaipur Development Authority (JDA) vide Work order No. JDA/EE/PHEI/WO/2021-2022/Nov/08 dated 3rd November, 2021 for Operation and Maintenance of Water Supply Scheme for 1 year in JDA Jurisdiction at PHE – I (South) Jaipur.

The important aspects of the said contract are mentioned as under:

“- Pure Labour Service Contract including involvement of material not exceeding 25 per cent of total contract value.

  1.  That, Jaipur Development Authority is a body constituted under The Jaipur Development Authority Act, 1982 as a special vehicle for undertaking of various government projects as envisaged by the Government of Rajasthan.

The major works executed by the RIICO includes the following: –

  •  Infrastructural Development of Rajasthan region by construction of Roads, flyovers, etc.
  •  Development of Commercial projects and residential buildings for residential purpose.
  •  Development of basic amenities like parks, roads.
  •  Development & Rehabilitation of Industries.
  •  Preparation and implementation of guidelines for colonisation of industrial area.
  •  Environment development by planning and implementing roadside plantations and by developing eco-friendly schemes.
  •  Development of industrial area around region of Rajasthan
  •  Development of Transport facilities.

   2.  That Jaipur Development Authority is covered under the status of Government”

The applicant explained meaning of ‘Government’ elaborately.

Based on above the applicant submitted that the GST rate applicable for the nature of work being awarded will be ‘NIL’ as per description of the services mentioned at Sl. No. 3A of the Notification No. – 12/2017 – Central Tax Rate dt. 28th June, 2017 GST.

The said entry is also reproduced in AR as under:

“Notification No. – 12/2017 dated 28th June, 2017: -“3A.

“Composite supply of goods and services in which the value of supply of goods constitutes not more than 25 per cent of the value of the said composite supply provided to the Central Government, State Government or Union territory or local authority or a Governmental authority or a Government Entity by way of any activity in relation to any function entrusted to a Panchayat under article 243G of the Constitution or in relation to any function entrusted to a Municipality under article 243W of the Constitution.”

The ld. AAR referred to definition of ‘Government’ in section 2(53) of RGST Act, 2017 which means the Government of Rajasthan.

The reference also made to meaning given in General Clauses Act, 1897 and other Constitutional Provisions.

The ld. AAR observed that as per Clause (60) of Section 3 of the General Clauses Act, 1897, the ‘State Government’, in respect to anything done after the commencement of the Constitution, shall be in a State the Governor, and in a Union Territory the Central Government. It is further observed that as per Article 154 of the Constitution, the executive power of the State shall be vested in the Governor and shall be exercised by him either directly or indirectly through officers subordinate to him in accordance with the Constitution and all executive actions of the Government of State shall be expressed to be taken in the name of Governor. Therefore, as per ld. AAR, State Government means the Governor or the officers subordinate to him who exercise the executive powers of the State vested in the Governor and in the name of the Governor.

As compared to above, the ld. AAR observed that JDA is a body corporate having perpetual succession and a common seal with powers subject to the provision of Jaipur Development Authority Act, 1982. It is further observed that it has power to act, to acquire, hold and dispose of property both movable and immovable and may sue or to be sued by its corporate name of JDA. The ld. AAR observed that JDA shall be deemed to be a local authority within the meaning of the term local authority as defined in Rajasthan General Clauses Act, 1955.

The ld. AAR also observed that the ‘government authority’ is defined in clause (zf) of notification no. 12/2017 dated 28th June, 2017 of Central Goods and service Tax Act 2017 as amended, which is as under- “Governmental Authority” means an authority or a board or any other body, –

“(i) Set up by an Act of Parliament or a State Legislature; or

(ii) Established by any Government, with 90 per cent or more participation by way of equity or control, to carry out any function entrusted to a Municipality under article 243W of the Constitution or to a Panchayat under article 243G of the Constitution.”

The ld. AAR observed and found from records that JDA is constituted by State Government under Jaipur Development Authority Act 1982 (Act No. 25 of 1982) and fully controlled by state government and hence JDA is Governmental Authority under GST Act. The ld. AAR has indicated to consider rate as applicable to ‘Governmental Authority’.

Based on above factual/legal position, the ld. AAR gave ruling as under:

“Q.1: Whether the Jaipur Development Authority can be considered as State Government in regards of entry 3A of Notification No. – 12/2017 – CT (Rate) dated
28.06.2017?

Ans.1: No, Jaipur Development Authority is not covered under the definition of “State Government” in reference of entry 3A of Notification No. – 12/2017 – CT (Rate) dated 28.06.2017.”

8 Pure Agent / Functioning under Article 243G

M/s Andhra Pradesh Medical Service and Infrastructure Development Corporation (AR Order No. AAAR/AP/09(GST)/2022 dated 20th December, 2022 (AP)

The appellant above had applied for AR on following issues:

“a. Whether the procurement and distribution of drugs, medicines and other surgical equipment by APMSIDC on behalf of government without any value addition, and without any profit or loss, without even the intent to do any business amounts to supply under section 7 of CGST/SGST Act.

b. Whether the establishment charges received from State Government as per G.O.RT 672 dated 20th May, 1998 and G.O RT 1357 dated 19th October, 2009 by APMSIDC is eligible for exemption as per Entry 3 or 3A of Notification 12/2017 Central Tax (rate)?”

The ld. AAR, AP pronounced a ruling (AAR No.10/AP/GST/2022 Dt.30th May, 2022) that the transaction under question (1) is supply and that the establishment charges being ancillary to the principal supply are also included in the supply.

The appellant has filed appeal on ground that the ld. AAR has not considered facts correctly. It was contended that though the supplies obtained by appellant are supply transactions, the question required to be considered was whether the distribution effected by APMSIDC as per the instructions of Government, are amounting to supply?

The further issue is about establishment charges received from government which should be eligible for the exemption under item 3 or 3A of Notification 12/2017.

The ld. AAAR observed that the issue to be decided was as under:

“a. Whether the procurement and distribution of drugs, medicines and other surgical equipment by APMSIDC

– on behalf of government without any value addition

– without any profit or loss

– without even the intent to do any business

– amounts to supply under section 7 of CGST/SGST Act.”

The ld. AAAR observed that a careful reading of the question preferred by the appellant brings to light that there are two transactions involved in the issue in question. The first transaction is the transaction of procurement by the appellant and the other is distribution thereof. The ld. AAAR has referred to activity of procurement in details and thereafter observed that on examination of all the facts and procedures, it can be concluded that the process of procurement by the APMSIDC is GST compliant where there is a purchaser, supplier and consideration and GST is discharged on the consideration.

Regarding the transaction of distribution of medicines by the appellant, the ld. AAAR referred to scope of ‘supply’ given under Section 7 and observed that the following parameters should be adopted to characterise any transaction to be a supply.

  •  “Supply of goods or services or both (Supply of anything other than goods or services does not attract GST).
  •  Supply should be made for a consideration.
  •  Supply should be made in the course or furtherance of business.
  •  Supply should be a taxable supply.”

In this respect, the ld. AAAR referred to process of distribution and observed as under:

“From a synchronous reading of the scope of supply and deemed supply and the activities undertaken by the APMSIDC, it can be concluded that the transaction of making the medicines available to the hospitals and primary health centres (PHCs) by the APMSIDC do amount to supply or deemed supply of medicines. There is no purchaser and seller involved in the activity of making the medicines available by the APMSIDC to hospitals and PHCs. The APMSIDC is only responsible for ensuring that adequate quantities of medicines are available at all the hospitals and health centres / establish appropriate transportation and logistics arrangements to deliver the medicines indented by each health facility at its door step / arrange to supply medicines systematically to all the hospitals. In other words, the APMSIDC is the nodal agency for distribution of medicines to various hospitals and PHCs in terms of G.O Rt. No. 1357 dated 19th October, 2009.

Therefore, the second transaction of distribution of medicines by the APMSIDC to various hospitals and PHCs in terms of G.O Rt. No. 1357 dated 19th October, 2009 fall within the ambit of supply and therefore is taxable.”

The ld. AAAR observed that the taxable value of service is nothing but the ‘2 per cent on the cost of procurement and distribution of drugs, consumables and equipment for Hospitals’ and found that the appellant is providing Pure Service (supply / distribution of drugs, consumables and equipment for Hospitals) to State Government by way of an activity in relation to a function entrusted to a Panchayat under Article 243G (Sl.No.23 of Eleventh Schedule of Article 243G of Constitution i.e. Health and sanitation, including hospitals, primary health centres and dispensaries.

The ld. AAAR thereafter observed that the service provided by the appellant in the instant case is qualifying all the conditions stipulated at Sl.No.3 of Notification No.12/2017-CT (Rate) Dated 28th June, 2017 and thereby GST for the said service is ‘Nil’.

The ld. AAAR thereafter referred to second issue as to whether the establishment charges received from State Government as per G.O.RT 672 dated 20th May, 1998 and G.O.RT 1357 dated 19th October, 2009 by appellant are eligible for exemption as per Entry 3 or 3A of Notification 12/2017 Central Tax (rate) or not?

The ld. AAAR observed as under:

“The applicant contends that the establishment charges received from the State Government of Andhra Pradesh are out of the budgetary grants provided in the State Budget. The above receipts are provided to the Corporation only for the services rendered by the entity, but are not in relation to any goods provided. In case of drugs and surgical, Corporation is procuring the goods as per the mandate of the Ministry of Health and will be distributed to the PHCs and other Hospitals as per the indents raised by them. All the commodities are remitted as per the instructions and Corporation is not at all concerned with any of the goods. The Corporation does not incur any profit or loss on any of the commodities. Hence the remuneration earned by Corporation is for the pure services alone and the same is also evidenced by the above-referred Government Orders.”

The ld. AAAR observed that the service rendered by the appellant is in relation to a function entrusted to a Panchayat under Article 243G of the Constitution of India and therefore held that the establishment charges are also exempt as per entry 3/3A of Notification 12/2017 Central Tax (Rate). Thus, the original AR is modified as above by the ld. AAAR.

9 Governmental Authority — Incidental / Ancillary objects

M/s. SOM VCL (JV) (AR Order No. AAAR/09/ 2022(AR) dated 15th November, 2022 (TN)

The appellant M/s. “SOM VCL (JV)” was formed solely for carrying out the works contract service for Kudankulam Nuclear Power project, a unit of Nuclear Power Corporation of India Ltd (NPCIL) at their site at “Anuvijay Township, Kudankulam, Radhapuram Taluk, Tirunelveli, Tamilnadu. The appellant had stated that they were awarded a project by NPCIL, a Government entity for carrying construction of 360 Nos. (D-type 240 Nos, D-special 80 Nos and E-type 40 Nos.) residential quarters (9 blocks of G+10 floors) for residential usage of their employees at Anuvijay Township. The Appellant filed an application before the ld. AAR seeking clarification on the following questions:

  1. “ Whether the execution of works contract service at Kudankulam Nuclear Power Project would be covered under S. No. vi (or) vii of Notification No. 24/2017 dated 21st September, 2017 attracting GST@12 per cent or 18 per cent; and
  2.  The assessee had already charged GST @12 per cent on its invoices for the works contract service provided. In case the rate of GST is determined to be 18 per cent instead of 12 per cent should they pay the differential tax through debit note under GSTR 1?”

The ld. AAR had vide Order no.10/AAR/2022 dated 22nd March, 2022 – 2022-VIL-115-AAR ruled as follows:

“1. The execution of works contract service for construction of residential quarters to the employees of Kudankulam Nuclear Power Project was not covered under Sl. No. 3(vi) of Notification 11/2017-CT-Rate dt. 28th June, 2017 for the reasons stated in Para 7 above. The applicable rate was @18 per cent GST as per Sl. No. 3(xii) of Notification 11/2017-CT-Rate dt. 28th June, 2017 (as amended) read with the corresponding TNGST Notification.; and

2. The question on how the differential tax was to be paid was a procedural aspects of payment and was out of the purview of Section 97(2) and hence was not answered.”

This appeal is filed against above AR.

The appellant has challenged ruling mainly on the ground that the ld. AAR has wrongly held that the work of the construction of residential quarters was a welfare measure done by KKNPP for their employees and further that it cannot be construed to be in relation with the work entrusted to NPCIL by the Central Government. It was submitted that in view of above the benefit of lower rate under GST is denied to appellant, which is unjustified.

Since the appellant has sought clarification on the applicability of the concessional rate of Tax of 12 per cent GST as per the entry sl. No. 3(vi) of Notification No. 11/2017-C.T. (Rate) as amended, the ld. AAAR reproduced said entry in AR as under:

“[[(vi) [Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, other than that covered by items (i), (ia), (ib), (ic), (id), (ie) and (if) above}25 provided]26 to the Central Government, State Government, Union Territory, a local authority, a Governmental Authority or a Government Entity]27 by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of –

(a) a civil structure or any other original works meant

predominantly for use other than for commerce, industry, or any other business or profession;

 6 {Provided that where the services are supplied to a Government Entity, they should have been procured by the said entity in relation to a work entrusted to it by the Central Government, State Government, Union territory or local authority, as the case may  be}29]30]31”
(b) a structure meant predominantly for use as (i) an

educational, (ii) a clinical, or (iii) an art or cultural establishment; or

(c) a residential complex predominantly meant for self-use or the use of their employees or other persons specified in paragraph 3 of the Schedule III of the Central Goods and Services Tax Act, 2017.

[Explanation.- For the purposes of this item, the term ‘business’ shall not include any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities.]28

The ld. AAAR referred to the MOA furnished alongwith the appeal application, wherein Main Objects to be pursued by NPCIL is ‘Development of Nuclear Power; Protection of the Environment; Manufacturing, trading and the Objects incidental or ancillary to attainment of the main objects, power to acquire and lease property, to provide for welfare of employees, etc. The ld. AAAR also found that under the clause ‘To acquire andlease property’, it was mentioned ‘to acquire bypurchase, lease, exchange, hire or ….. apartments, plant, machinery and hereditaments of any nature or description situated in India or any other part and turn the same to account in any manner as may seem expedient, necessary or convenient to the Company for tire purposes of its business’,”

The ld. AAAR also found from the letter furnished by the appellant that the project of constructing residential quarters at Anuvijay Township, Kudankulam was meant exclusively for use of the employees with certification that the said township was in direct relation to the fulfilling obligations entrusted to NPCIL and as per the objects of NPCIL in its MOA.

Reading of the MOA of NPCIL and the certificate dt. 21st July, 2022 jointly, the ld. AAAR observed that the works relating to construction of residential quarters are exclusively meant for use of the employees of NPCIL at Kundankulam Project and acquiring such buildings are incidental or ancillary to attainment of the main object of NPCIL, a government entity. Since the objection mentioned in AR is now clarified, the ld. AAAR held that, the appellant is eligible for the concessional rate of tax @6 per cent of CGST plus 6 per cent of SGST as per entry 3(vi) of Notification No. 11/2017-C.T. (Rate) dated 28th June, 2017 (as amended) read with the corresponding Notification under TNGSTA, for the period up to 31st December, 2021. Since the said Notification is amended from 1st January, 2022 to remove the category of Governmental Authority from said entry from 1st January, 2002, the rate will be 18 per cent, observed the ld. AAAR.

Accordingly, the ld. AAAR modified original order of AAR as under:

“The execution of works contract service for construction of residential quarters exclusively meant for the employees of NPCIL at Anuvijay Township by the appellant is covered under entry Sl.No.3(vi) of Notification No. 11/2017-C.T.(Rate) dated 28th June, 2017 andthe corresponding SGST Notification for the period up to 31st December, 2021.”

Interpreting Section 16 (4) Of CGST ACT, 2017

Input tax credit forms the core of any indirect tax legislation. It removes the cascading effect of indirect tax structure and permits a seamless flow of transactions across the entire transaction chain. While ITC is a substantial benefit granted by the law and thus, a right of the taxpayer, the said right has to be exercised within reasonable time as prescribed by the Statute. Section 16(4) of the CGST Act, 2017 prescribes the said timeline and reads as under:

(4) A registered person shall not be entitled to take the input tax credit in respect of any invoice or debit note for the supply of goods or services or both after the [30th day of November]1 following the end of the financial year to which such invoice or [invoice relating to such]2 debit note pertains or furnishing of the relevant annual return, whichever is earlier.

[Provided that the registered person shall be entitled to take input tax credit after the due date of furnishing of the return under section 39 for the month of September 2018 till the due date of furnishing of the return under the said section for the month of March 2019 in respect of any invoice or invoice relating to such debit note for the supply of goods or services or both made during the financial year 2017–18, the details of which have been uploaded by the supplier under sub-section (1) of section 37 till the due date for furnishing the details under sub-section (1) of said section for the month of March, 2019.]3

1   Substituted for “due date of furnishing of the return under section 39 for the month of September” w.e.f 01.10.2022

2   Omitted w.e.f 01.01.2021

3   Inserted vide Order No. 02/2018-CT dated 31.12.2018

To illustrate the above provisions simply, the due date for taking the ITC in respect of any invoice issued during a particular year, say 2018–19, was 20th October 2019, being the due date for filing GSTR-3B for the month of September 2019. However, what is meant by ‘taking ITC’?

There can be different scenarios that a taxpayer can encounter in such a case, such as:

a) The taxpayer has not filed the return for March 2019 till 20th October, 2019 and intends to file the said return and claim the credit in the return for the tax period of March 2019 to be filed after 20th October, 2019, (i.e., delayed return of 2018–19).

b) The taxpayer files the returns for all / certain periods from April 2019 to September 2019 after 20th October, 2019 and in such returns, he intends to claim the ITC of invoices dated 2018–19.

c) The taxpayer claims the ITC in the returns filed for the tax period of October 2019 and thereafter.

The tax authorities interpret the concept of ‘taking ITC’ as equivalent to claim / availment of ITC in the return and therefore allege that in all the above cases, the ITC claimed would be barred by section 16 (4) resulting in issuance of notice on this aspect. Such an understanding has also been confirmed by the Hon’ble High Courts in multiple cases4 wherein the constitutional validity of the said provisions was challenged in writ proceedings and the same were dismissed.

4   Gobinda Construction vs. Union of India [(2023) 10 Centax 196 (Pat.)], BBA Infrastructure Ltd. vs. Sr. Jt. Commissioner of State Tax [(2023) 13 Centax 181 (Cal.)]

In this article, we have attempted to analyse the said decisions upholding the constitutional validity of section 16 (4) and also other defences which may still be available with the taxpayers facing such proceedings.

The core issues that would need deliberation are:

a) Is section 16 (4) constitutionally valid?

b) If yes, how is section 16 (4) to be interpreted? What is meant by taking credit? Is it to be read in the context of accounting in books or disclosure of credits in the returns?

c) What constitutes return u/s 39, at least till the time GSTR-3B was notified as return u/s 39 retrospectively for the time limit prescribed u/s 16 (4) to be triggered?

d) Whether the condition u/s 16 (4) applies to all types of ITC, i.e., import of goods, taxes paid under RCM or only to ITC claimed on the strength of tax charged on the invoice by the supplier?

Apart from the above issues, the following issues have been raised during the Department Audits/scrutiny:

a) Whether section 16 (4) applies to all categories of ITC or only in cases where the ITC is claimed on tax charged by suppliers?

b) Whether section 16 (4) will get triggered if the supplier has filed a return after the due date?

This article discusses each of the above issues in detail.

Is section 16 (4) constitutionally valid?

Since the various decisions wherein the constitutional validity of section 16 (4) was challenged were vide a writ petition under Article 226, the petitioners in the said case were required to demonstrate how section 16 (4) is ultra vires the Constitution.

The said challenge was on the premise that the provisions violate the constitutional rights guaranteed under Article 300, i.e., the right to property, and Article 14, i.e., the right to equality.

Before analysing what the High Courts have held, let us first quickly analyse the vexed question, i.e., whether ITC is a vested right or concession available to the taxpayer. In the case of Eicher Motors Limited vs. UOI [1999 (106) E.L.T. 3 (S.C.)], it was held that once credit has been rightly availed, it becomes a vested right and the taxpayer would be well within his right to utilize such credit. Relevant extracts of the said decision are reproduced below:

5. … … As pointed out by us when on the strength of the rules available certain acts have been done by the parties concerned, incidents following thereto must take place in accordance with the scheme under which the duty had been paid on the manufactured products and if such a situation is sought to be altered, necessarily it follows that right, which had accrued to a party such as availability of a scheme, is affected and, in particular, it loses sight of the fact that provision for facility of credit is as good as tax paid till tax is adjusted on future goods on the basis of the several commitments which would have been made by the assessees concerned. Therefore, the scheme sought to be introduced cannot be made applicable to the goods which had already come into existence in respect of which the earlier scheme was applied under which the assessees had availed of the credit facility for payment of taxes. It is on the basis of the earlier scheme necessarily the taxes have to be adjusted and payment made complete. Any manner or mode of application of the said rule would result in affecting the rights of the assessees.

However, as the concept of ITC evolved, the larger question that was raised on numerous occasions was whether the right to claim credit in the first place itself is a fundamental or vested right or it is a concession provided under the Statute. In a series of decisions, the Supreme Court had held that the right to claim credit, even if flowing from statute, is nothing but a concession. In Jayam & Co. vs. Assistant Commissioner [2018 (19) GSTL 3 (SC)], the Supreme Court held as under:

12. It is a trite law that whenever concession is given by statute or notification etc. the conditions thereof are to be strictly complied with in order to avail such concession. Thus, it is not the right of the ‘dealers’ to get the benefit of ITC but it is a concession granted by virtue of Section 19. As a fortiorari, conditions specified in Section 10 must be fulfilled. In that hue, we find that Section 10 makes the original tax invoice relevant for the purpose of claiming tax. Therefore, under the scheme of the VAT Act, it is not permissible for the dealers to argue that the price as indicated in the tax invoice should not have been taken into consideration but the net purchase price after discount is to be the basis. If we were dealing with any other aspect do hors the issue of ITC as per Section 19 of the VAT Act, possibly the arguments of Mr. Bagaria would have assumed some relevance. But, keeping in view the scope of the issue, such a plea is not admissible having regard to the plain language of sections of the VAT Act, read along with other provisions of the said Act as referred to above.

The above view has been followed by the Supreme Court in a series of decisions, such as ALD Automotive vs. Commercial Tax Officers [2018 (364) E.L.T. 3 (S.C.)] and TVS Motor Company Limited vs. State of Tamil Nadu [2018 (18) G.S.T.L. 769 (S.C.)].

Therefore, under the pre-GST regime, it was more or less a settled principle that ITC was a concession and therefore cannot be claimed as a right unless statutorily provided. Even under the GST regime, the Court5 has reiterated that ITC is a concession given by the statute and cannot be claimed as a constitutionally guaranteed right.

5   Thirumalakonda Plywoods vs. Assistant Commissioner of State Tax [(2023) 8 Centax 276 (A.P.)]

Similarly, even the challenge invoking Article 14 was not accepted because the provision prescribing the timelimit has universal applicability and therefore, it cannot be claimed that there is inequality.

It must, however, be noted that there have been exceptions where the taxpayers were able to get favourable rulings from Court. In Kavin HP Gas Gramin Vitrak vs. CCT [(2024) 14 Centax 90 (Mad.)], in a case where delay in filing Form GSTR-3B was on account of lack of funds to pay output tax, the High Court has held as under:

11. The next contention of the petitioner is that the ITC can be claimed through GSTR-3B, but GSTN has not been permitted to file GSTR-3B online if the dealers had not paid taxes on the outward supply/sales. In other words, if the dealer is not enabled to pay output tax, he is not permitted to file a GSTR-3B return online and it is indirectly obstructing the dealer from claiming ITC. In the present case, the petitioner was unable to pay output taxes so the GSTN was not permitted to file GSTR-3B in the departmental web portal it is constructed that the petitioner had not filed GSTR-3B online, which resulted in the dealer being unable to claim his ITC in that particular year in which he paid taxes in his purchases.

Hence if the GSTN provided an option for filing GSTN without payment of tax or incomplete GSTR-3B, the dealer would be eligible to claim of input tax credit. The same was not provided in the GSTN network hence, the dealers are restricted from claiming ITC on the ground of non-filing of GSTR-3B within the prescribed time. if the option of filing incomplete filing of GSTR-3B is provided in the GSTN network the dealers would avail the claim and determine self-assessed ITC online. The petitioner had expressed real practical difficulty. The GST Council may be the appropriate authority but the respondents ought to take steps to rectify the same. Until then the respondents ought to allow the dealers to file returns manually.

In one more case where the taxpayer’s registration certificate was cancelled and subsequently revoked and by then, the time limit to claim ITC for the period for which registration was cancelled had already expired, the Hon’ble High Court had allowed the said credit claimed in such returns despite there being no exception provided for in section 16 (4) of CGST Act, 2017. (K Periyasami vs. Dy. State Tax Officer [(2023) 8 Centax 25 (Mad.)])

From the above, it is clear that barring a few exceptions, the Courts have predominantly upheld the constitutional validity of section 16 (4) of the CGST Act, 2017.

If section 16 (4) is constitutionally valid, is the interpretation advanced by the tax authorities correct or is there an alternate interpretation possible?

As discussed above, the interpretation emanating from a plain reading of section 16 (4) is that the ITC of tax charged on any invoice or debit note issued in a particular financial year cannot be claimed after the due date of filing the return for the month of September of the next financial year. In other words, a taxpayer cannot claim credit relating to invoice/ debit note relating to financial year 2018–19 after 20th October, 2019. This view was also canvased by CBIC in a press release dated 18th October, 2018 as under:

3. With taxpayers self-assessing and availing ITC through return in FORM GSTR-3B, the last date for availing ITC in relation to the said invoices issued by the corresponding supplier(s) during the period from July, 2017 to March, 2018 is the last date for the filing of such return for the month of September, 2018 i.e., 20th October, 2018”

However, an aspect which seems to have been missed out in the proceedings before the Writ Courts is what is meant by “shall not be entitled to take credit” referred to in section 16 (4)? Does it mean taking ITC in the return prescribed u/s 39? One can take a view that credit is taken when the same is accounted for in the books of accounts when the eligibility to take the credit is to be examined. Further, the importance of entries in books of account to avail of credit is recognized under the CGST Act as well. Section 35 requires every taxable person to maintain a true and correct account of the ITC availed. Based on this account maintained, the taxable person is required to report the figures of ITC availed in books of accounts in GSTR 9C (i.e., audit report) irrespective of whether the same has been disclosed in the returns or not. This amount can further be adjusted for credits claimed in returns of subsequent periods and for credits of earlier periods claimed in returns of the current period to arrive at the credits claimed in the returns filed for the period under audit. This demonstrates that the taking of credit envisaged u/s 16 is vis-à-vis the accounting of credits in books of accounts and not in the returns.

In fact, in the context of CENVAT Credit, the decision of the Mumbai Tribunal in the case of Voss Exotech Automotive Private Limited vs. CCE, Pune — I [2018 (363) ELT 1141 (Tri — Mum)] holds relevance. The facts of the said case were that under the CENVAT Credit regime, initially there was no time limit prescribed for claiming credits. Subsequently, vide insertion of proviso to Rule 4 (7), a condition was introduced to provide that credit cannotbe claimed after the expiry of a specified period from the date of invoice. The relevant provision is reproduced below:

Provided also that the manufacturer or the provider of output service shall not take CENVAT Credit after [one year] of the date of issue of any of the documents specified in sub-rule (1) of Rule 9.

In this case, the assessee had argued before the Tribunal that if the invoice was accounted within the prescribed time limit, i.e., one year from the date of invoice, merely because there was a delay in disclosing this invoice in the returns would not impair its right to claim the credit. In this case, the Tribunal held as under:

4. On careful consideration of the submissions made by both sides, I find that for denial of the credit, the Notification No. 21/2014-C.E. (N.T.), dated11th July, 2014 was invoked wherein six-month period is available for taking credit. As per the facts of the case, credit was taken in respect of the invoices issued in the month of March & April 2014 in November 2014. On going through Notification No. 6/2015-C.E. (N.T.), dated 1st March, 2015 the period available for taking credit is 1 year in terms of the notification, the invoices issued in the month of March and April 2014 become eligible for Cenvat credit. I also observed that Notification No. 21/2014-S.T. (N.T.), dated 11th July, 2014 should be applicable to those cases wherein the invoices were issued on or after 11th July, 2014 for the reason that notification was not applicable to the invoices issued prior to the date of notification therefore at the time of issuance of the invoices no time limit was prescribed. Therefore in respect to those invoices, the limitation of six months cannot be made applicable. Moreover, for taking credit, there are no statutory records prescribing the assessee’s records were considered as accounts for Cenvat credit. Even though the credit was not entered in so-called RG-23A, Part-II, but it is recorded in the books of accounts, it will be considered as Cenvat credit was recorded. On this ground also it can be said that there is no delay in taking the credit. As per my above discussion, the appellant is entitled to the Cenvat credit hence the impugned order is set aside. The appeal is allowed.

In fact, if it indeed was the intention of the legislature to link credits u/s 16 (4) with disclosure in the returns and not books of accounts, the same would have been specifically provided for in the section itself. For instance, section 41 deals with provisions relating to taking of ITC in returns and therefore, it specifically provides so. Had the legislature intended to restrict the taking of credit in returns by section 16 (4), the same would have been categorically provided for. On the contrary, had the conditions imposed by section 16 (4) been part of section 41, this controversy would not have arisen.

An interesting observation in this regard has been made in UOI vs. Bharti Airtel Limited [2021 (54) G.S.T.L. 257 (S.C.)]. In this case, the Supreme Court has held that the primary source for self-assessment of outward liability is the books of accounts, from where the information is to be furnished for discharge of liability. Relevant extracts are reproduced below for reference:

35. As aforesaid, every assessee is under obligation to self-assess the eligible ITC under Section 16(1) and 16(2) and “credit the same in the electronic credit ledger” defined in Section 2(46) read with Section 49(2) of the 2017 Act. Only thereafter, Section 59 steps in, whereunder the registered person is obliged to self-assess the taxes payable under the Act and furnish a return for each tax period as specified under Section 39 of the Act. To put it differently, for submitting a return under Section 59, it is the registered person who has to undertake necessary measures including maintaining books of account for the relevant period either manually or electronically. On the basis of such primary material, self-assessment can be and ought to be done by the assessee about the eligibility and availing of ITC and OTL, which is reflected in the periodical return to be filed under Section 59 of the Act.

As can be seen from the above, the decision does not require that the ITC taken in books of accounts during a particular month needs to be shown in the periodical return in the same month. The taxpayer can be at liberty to defer the disclosure of ITC in the prescribed return. This hints at the fact that to demonstrate availment of ITC, books of accounts are the basis and not the GST returns. A taxpayer cannot disclose ITC in his return without accounting for it in his books.

Furthermore, if the stance of the tax authorities that section 16 (4) applies to a claim of credit in returns and not books of accounts is accepted, it would result in contradiction with the provisions of section 16 itself. Section 16 (2) overrides other provisions of section 16 and provides that a person shall be entitled to claim ITC only if the returns prescribed u/s 39 have been furnished. It nowhere provides that returns u/s 39 have to be filed within the prescribed time limit. In other words, section 16 (2) itself entitles the recipient to claim credit at the time of filing return u/s 39, i.e., without filing return u/s 39, credit cannot be claimed. Therefore, in cases where the return u/s 39 is filed with a delay, for instance, returns of March 2019 are filed in November 2019 and credits are claimed along with those returns, it would mean that the outer time limit to take the credits u/s 16 (4), i.e., 20th October as envisaged in the returns is before the date of entitlement to take the credit provided by the overriding provision, i.e., section 16 (2) which would result in contradiction within the provisions of section 16 itself. Therefore, the stance of the tax authorities that section 16 (4) imposes restrictions on the claim of credit in the returns is incorrect and renders the entire scheme unworkable. In fact, such an interpretation amounts to expecting the taxpayer to comply with something which is impossible to do.

However, in Thirumalakonda Plywoods vs. Assistant Commissioner of State Tax [(2023) 8 Centax 276 (A.P.)], the Hon’ble High Court rejected the above arguments and held as under:

Further, the influence of a non-obstante clause has to be considered on the basis of the context also in which it is used. Therefore, section 16(4) being a non-contradictory provision and capable of clear interpretation, will not be overridden by non-obstante provision u/s 16(2). As already stated supra 16(4) only prescribes a time restriction to avail credit. For this reason, the argument that 16(2) overrides 16(4) is not correct.

Thus in substance section 16(1) is an enabling clause for ITC; 16(2) subjects such entitlement to certain conditions; section 16(3) and (4) further restrict the entitlement given u/s 16(1). That being the scheme of the provision, it is out of context to contend that one of the restricting provisions overrides the other two restrictions. The issue can be looked into otherwise also. If really the legislature has no intention to impose a time limitation for availing ITC, there was no necessity to insert a specific provision U/s 16(4) and to further intend to override it through section 16(2) which is a futile exercise.6

6   A similar view has been followed in the case of Gobinda Construction vs. Union of India [(2023) 10 Centax 196 (Pat.)] and BBA Infrastructure Ltd. vs. Sr.
 Jt. Commissioner of State Tax [(2023) 13 Centax 181 (Cal.)] as well.

 

In this case, it was also argued that payment of the late fee along with GSTR-3B would exonerate delay in filing of return and therefore along with the return, the claim of ITC should also be considered. However, this argument has also been rejected on the grounds that mere payment of late fees cannot act as a springboard for claiming ITC. A statutory limitation cannot be stifled by collecting late fees.

GSTR-3 VS. GSTR-3B: A DIFFERENT TALE FOR FY 2017-18 & 2018–19

Section 16 (4), while inserting the timeline for claiming ITC, refers to the return to be furnished u/s 39. As readers would be aware, at the time of the introduction of GST, GSTR-3 was the return prescribed u/s 39 though the implementation of the said return was kept in abeyance and ultimately scrapped. Before the amendment scrapping GSTR-3 was introduced, a petition was filed challenging the press release dated 18th October, 2018 before the Gujarat High Court in the case of AAP & CO vs. UOI [2019 (26) G.S.T.L. 481 (Guj.)] wherein it was held that GSTR-3B was not a return prescribed u/s 39 of CGST Act, 2017. Therefore, the time limit prescribed u/s 16 (4) was not triggered.

However, subsequently, vide a retrospective amendment w.e.f 9th October, 2019, GSTR-3B was notified as return u/s 39. This amendment was apparently to nullify the decision of the Gujarat High Court in the case of AAP and Co. and the same was ultimately overruled by the Supreme Court in Bharti Airtel’s case wherein it has been held as under:

41. The Gujarat High Court in the case of AAP & Co., Chartered Accountants through Authorized Partner v. Union of India & Ors. [2019-TIOL-1422-HC-AHM-GST = 2019 (26) G.S.T.L. 481 (Guj.)], was called upon to consider the question of whether the return in Form GSTR-3B is the return required to be filed under Section 39 of the 2017 Act. Although, at the outset, it noted that the concerned writ petition had been rendered infructuous, went on to answer the question raised therein. It took the view that Form GSTR-3B was only a temporary stop-gap arrangement till the due date of filing of return Form GSTR-3 is notified. We do not subscribe to that view. Our view stands reinforced by the subsequent amendment to Rule 61(5), restating and clarifying the position that where a return in Form GSTR-3B has been furnished by the registered person, he shall not be required to furnish the return in Form GSTR-3. This amendment was notified and came into effect from 1st July, 2017 [Vide Notification/GSR No. 772(E), dated 9th October, 2019] retrospectively. The validity of this amendment has not been put in issue.

It must however be noted that though the above decision did not analyse the validity of the retrospective amendment, the Revenue appeal against the Gujarat High Court decision was allowed on the grounds that the judgment was expressly overruled in Bharti Airtel’s case. Till 8th October, 2019, the right to claim credit could not have been impacted by section 16 (4) as the filing of GSTR-3, which was the return prescribed u/s 39 was kept at abeyance till that date. It was only by a retrospective amendment that the same was substituted by a different return, for which the due date had already expired. This resulted in a substantive right available to the taxpayers on that day, i.e., till 8th October, 2019 being curtailed by a retrospective amendment, which is not permissible. In the case of Welspun Gujarat Stahl Rohren Limited vs. UoI [2010 (254) E.L.T. 551 (Guj.)], it has been held that the vested right of the petitioner to claim rebate was not affected for the impugned period despite retrospective amendment by Finance Act, 2008 covering the period from 1st March, 2002 to 7th December, 2006. This decision was upheld by the Supreme Court in 2010 (256) ELT A161 (SC).

Further, in Jayam & Co. vs. Assistant Commissioner [2018 (19) GSTL 3 (SC)], it was again held as under:

18. When we keep in mind the aforesaid parameters laid down by this Court in testing the validity of retrospective operation of fiscal laws, we find that the amendment in-question fails to meet these tests. The High Court has primarily gone by the fact that there was no unforeseen or unforeseeable financial burden imposed for the past period. That is not correct. Moreover, as can be seen, sub-section (20) of Section 19 is an altogether new provision introduced for determining the input tax in specified situations, i.e., where goods are sold at a lesser price than the purchase price of goods. The manner of calculation of the ITC was entirely different before this amendment In the example, which has been given by us in the earlier part of the judgment, the ‘dealer’ was entitled to an ITC of ₹10 on re-sale, which was paid by the dealer as VAT while purchasing the goods from the vendors. However, in view of Section 19(20) inserted by way of amendment, he would now be entitled to ITC of ₹9.50. This is clearly a provision which is made for the first time to the detriment of the dealers. Such a provision, therefore, cannot have a retrospective effect, more so, when vested right had accrued in favour of these dealers in respect of purchases and sales made between 1st January, 2007 to 19th August, 2010. Thus, while upholding the vires of sub-section (20) of Section 19, we set aside and strike down Amendment Act 22 of 2010 whereby this amendment was given retrospective effect from 1st January, 2007.

Therefore, it remains to be seen whether the retrospective amendment will survive judicial scrutiny or not, as and when taken up by the Supreme Court.

Whether section 16 (4) applies to all categories of ITC or only in cases where the ITC is claimed on tax charged by suppliers?

The tax authorities contend that the limitation applies to all claims of ITC. For instance, if the taxpayer fails to pay tax under the reverse charge mechanism during a particular period and the same is identified later, the question that remains is if the corresponding ITC of tax paid later can be claimed or not or whether such a claim is hit by limitation prescribed u/s 16 (4)? Further, the issue of whether the limitation applies to the claim of ITC on the import of goods also needs to be analysed.

To analyse this issue, let us refer to the provisions of section 16 (4):

(4) A registered person shall not be entitled to take the input tax credit in respect of any invoice or debit note for supply of goods or services or both … … ….

Section 16 (4) restricts the claim of ITC “in respect of” any invoice or debit note. The Supreme Court in the case of State of Madras vs. Swastik Tobacco Factory 1966 (17) STC 316 has held that the expression ‘in respect of’ lends specificity to the object thereafter. In the said case, it was held that duty in respect of goods will only mean the duty in respect of the said goods and not the duty on the raw materials. Similarly, in the current case, the said provision applies only to an ITC claim arising out of an invoice or debit note. It therefore becomes important to understand what the term “invoice” actually means.

Section 2 (66) of CGST Act, 2017 defines the terms “invoice” or “tax invoice” interchangeably to mean the tax invoice referred to in section 31. Simply put, any document that is titled “invoice” / “tax invoice” and is issued in terms of section 31 of the CGST Act, 2017 is an invoice. A document issued by a supplier outside India or an unregistered person to whom the provision of GST does not apply, may be termed invoice for commercial, legal and accounting purposes, but cannot be considered an invoice for GST law. In such cases, it cannot be said that the ITC is being claimed on the strength of an invoice or debit note. The need to refer to the definition provided under the statute has already been revalidated by the Hon’ble Supreme Court in Union of India vs. VKC Footsteps Private Limited [2021 (52) G.S.T.L. 513 (S.C.)] wherein it has been held that while interpreting the term “input” referred to in section 54 (3) (ii) of the CGST Act, 2017, the statutory definition u/s 2 (59) should be strictly followed and the expression cannot be broadened to include input services and capital goods.

In this context, it may be relevant to refer to section 16 (2) (a) of the Act which prescribes the document on the basis of which input tax credit can be claimed. The said clause requires the person claiming ITC to be in possession of a tax invoice, debit note, or such other tax-paying document as may be prescribed. Rule 36 prescribes the following documents on the basis of which input tax credit can be claimed:

a) Invoice issued by a supplier under the provisions of section 31.

b) Invoice generated in terms of section 31 (3) (f), i.e., receiver issuing an invoice for supplies received from unregistered suppliers.

c) Debit note issued by a supplier under the provisions of section 34.

d) Bill of Entry or any similar document prescribed under the Customs Act, 1962 for assessment of integrated tax on imports.

e) An ISD invoice, an ISD credit note, or any document issued by an ISD u/r 54 (1).

As compared to a wider set of documents prescribed under Section 16(2)(a) read with Rule 36 permitting the claim of input tax credit, the provisions prescribing the timeline for a claim of input tax credit only refer to two documents i.e., invoice and debit note.

Normally, in the case of the import of goods, there is an invoice issued by a supplier located outside India. However, the provisions of GST law do not apply to such overseas suppliers. The importer files a bill of entry for the assessment and clearance of goods for home consumption on the basis of the said invoice of the supplier. The bill of entry so filed is a document prescribed for availing ITC u/r 36. In this scenario, there is strong reasoning to say that section 16 (4) does not apply since credit is availed in respect of the bill of entry and not in respect of the invoice, though the bill of entry is filed in respect of an underlying invoice. In any case, the invoice issued by the supplier cannot be considered a tax invoice under section 31.

Let us consider a situation of reverse charge mechanism where the recipient has failed to pay any tax payable under RCM for, say 2018–19 and pays the same along with GSTR–3B of December 2019, i.e., after the time limit prescribed u/s 16 (4). The issue to be examined is whether he will be entitled to claim ITC of the tax so paid or the same will be hit by section 16 (4). On a reading of Rule 36 and the provisions of Section 31 governing tax invoices, it will be evident that the conclusion may vary based on the registration status of the supplier.

If the supplies are received from an unregistered person, the recipient is required to self-generate aninvoice u/s 31 (3) (f) and the said invoice becomesthe basis for the claim of ITC of tax paid as per rule 36. Therefore, a possible view in such a scenario is that the date of such self-invoice shall be relevant.Therefore, the taxpayer can argue that the invoice was issued in December 2019 though the liability pertained to the previous financial year. In such case, the claim of ITC may not be subject to section 16 (4) though the tax authorities may allege that there is a delay in the generation of self-invoice, which is nothing but a mere procedural lapse.

However, this may not apply to the tax paid under RCM on supplies received from registered suppliers. In case of supplies received from registered suppliers where RCM is applicable, such suppliers are required to issue an invoice in terms of section 31 of the CGST Act, 2017. Therefore, though the payment of tax took place in December 2019, it was in respect of an invoice issued in 2018–19 and therefore, hit by section 16 (4).

CONCLUSION

Time is of the essence under GST when it comesto claiming ITC. It is therefore important for thetaxpayers to periodically review the details of taxpaid on inward supplies received and ensure that the ITC so accounted in the books of accounts is also correspondingly claimed in the GST returns to avoid future litigation.

Service Tax

SUPREME COURT

29 Commissioner of Central Tax vs. IJM (India) Infrastructure Ltd.

2024 (15) Centax 309 (SC)

Date of Order: 2nd February, 2024

Service tax cannot be demanded for previous period outstanding receivables from associate enterprises where the law was amended prospectively.

FACTS

The respondent was engaged in providing different categories of taxable services. Pursuant to amendment in section 67 of Finance Act, 1994 and Rule 6 of Service Tax Rules, 1994, a SCN was issued demanding service tax amounting to ₹8,98,61,292 against receivables shown in books of accounts as outstanding from its associate enterprise under section 73(1) along with interest under section 75 and penalties under sections 76 and 78 of Finance Act, 1994. Also, a reply filed by the respondent was not considered and an Order-in-Original confirming tax demand along with interest and penalties was issued. Aggrieved, an appeal was filed by the respondent before the Tribunal and the same was allowed in favour of the respondent and an order demanding tax, interest and penalty were set aside. Being aggrieved by the Tribunal’s order, Revenue preferred an appeal before the Hon’ble Supreme Court.

HELD

Hon’ble Supreme Court did not interfere with the decision of Tribunal where it had relied upon the decision of Delhi High Court in case of Principal Commissioner of GST, Delhi vs. McDonalds India Pvt. Ltd.[2018 (8) GSTL 25 (Del.)] and held that amendments made in section 67 of Finance Act, 1994 and Rule 6 of Service Tax Rules, 1994 were amended w.e.f. 10th May, 2008 and could not be applied retrospectively. Accordingly, appeal was dismissed against appellant.

Goods And Services Tax

HIGH COURT

95 Star Health and Allied Insurance Co. Ltd. vs. State of Haryana

(2024) 15 Centax 468 (P&H.)

Date of Order: 25th January, 2024

The appeal cannot be rejected merely on the ground of limitation where it was filed electronically within the time period but the same was submitted physically beyond the prescribed time limit of 7 days as per Rule 108(3) of CGST Rules, 2017.

FACTS

Petitioner filed three appeals electronically on 27th May, 2022 before the appellate authority. Later, the same was filed manually on 10th June, 2022. Subsequently, all three appeals were rejected by the respondent on the ground that a self-certified copy of the order was not submitted by the petitioner within a period of 7 days as prescribed under Rule 108(3) of CGST Rules 2017. Aggrieved, a petition was filed before the Hon’ble High Court.

HELD

It was held that since the procedure prescribed in Rule 108(3) of CGST Rules, 2017 has been modified to consider the date of issuing provisional acknowledgement as the date of filing of an appeal, the mode of electronic filing of an appeal is accepted. Further, Hon’ble High Court after relying upon the decisions in the case of L.G. Electronics India (P.) Ltd vs. Union of India and others[CWP No. 12128 of 2020] and M/s. Suman Industries vs. State of Haryana and others [CWP No. 3602 of 2023] held that the respondent should decide the appeal on merits rather than dismissing on the grounds of technicalities. Hence, considering the date of electronic filing, appeal was filed within the period of limitation. Accordingly, order was set aside directing the Appellate Authority to decide the appeal on merits.

96 Arvindbhai Balubhai Vora vs. State of Gujarat

2023 (77) G.S.T.L 480 (Guj.)

Date of Order: 8th September, 2023

Bail cannot be denied where no notice in connection with evasion of GST was issued from GST Authorities especially where a co-accused was already released on bail.

FACTS

The applicant was alleged of the offence of GST evasion and was kept under the custody of an investigating officer after the registration of a First Information Report (FIR) against him. However, no GST notice was received from the GST authorities for of allegations with respect to tax evasion. Moreover, a co-accused was released on regular bail by a bench of the Hon’ble High Court. Accordingly, an application was filed by an applicant seeking a grant of regular bail before the Hon’ble High Court.

HELD

Hon’ble High Court squarely relied upon the decision given by the Hon’ble Apex Court in the case of Sanjay Chandra vs. CBI [2012] 1 SCC 40 wherein it was held that a regular bail be granted to the applicant. Further, the High Court directed the respondent to release the applicant on bail subject to execution of a personal bond amounting to ₹10,000 and subject to conditions stated in the order.

97 Chaizup Beverages LLP vs. Directorate General of System and Data Management (ICE-GATE)

2023 (78) G.S.T.L 79 (Mad.)

Date of Order: 19th July, 2023

The refund granted cannot be withheld by the respondent merely because the petitioner changed the bank account details for crediting the same.

FACTS

The petitioner had exported goods and claimed a refund of IGST paid on exports under section 54 of the CGST Act read with Rule 96 of CGST Rules, 2017. The Bank account designated for the purpose of the refund was closed by the petitioner by the time the refund claim was sanctioned. Thereafter, details of the new bank account opened were uploaded on ICEGATE Portal. Further, the petitioner raised a grievance with the Central Public Grievance Redress and Monitoring System (CPGRAMS) for crediting a refund to their new bank account. Subsequently, it was informed to the petitioner that a third respondent would redress the matter and transfer the refund amount to a new bank account. No refund was credited to the account of the petitioner thereafter. Aggrieved, the petition was filed before the Hon’ble High Court.

HELD

Hon’ble High Court held that once the petitioner is eligible for a refund, the same cannot be withheld by the respondent under the pretext that the old bank account was not operational. The concerned respondent was directed to credit the refund amount to the petitioner’s new bank account within a period of 15 days.

98 Bio Med Ingredients Pvt. Ltd. vs. Ass. Commr. (ST)/Commercial Tax Officer, Tamil Nadu

2024 (81) GSTL 133 (Mad.)

Date of Order: 1st November, 2023

Application for GST registration cannot berejected merely because both lessor andlessee were conducting separate businessesfrom the same premises without anydemarcation.

FACTS

Petitioner had applied for GST registration on 31st July, 2023 which was rejected by respondent without specifying any reason. Subsequently,the petitioner applied for GST registration once again and the same was rejected without conducting physical verification stating that both lessor and lessee were running their own businesses at the same premises. Being aggrieved, a writ petition was filed before Hon’ble High Court.

HELD

Hon’ble Court by adopting a justice-oriented approach held that respondent shall issue GST registrationnumber to petitioner within a period of one week.Further, the Court directed the petitioner to demarcatethe property within a period of one week from the date of issue of GST number and file demarcation report. Accordingly, the petition was disposed of in favour of the petitioner.

Recent Developments in GST

A. NOTIFICATIONS

1. Notification No.06/2024-Central Tax dated 22nd February, 2024

The above notification seeks to notify “Public Tech Platform for Frictionless Credit” as the system with which information may be shared by the common portal based on consent under sub-section (2) of Section 158A of the Central Goods and Services Tax Act, 2017.

B. ADVISORY / INSTRUCTIONS

a) The GSTN has issued an Advisory dated 21st February, 2024, giving information about new features of the revamped E-invoice Master Information Portal.

b) The GSTN has issued an Advisory dated 28th February, 2024 giving information about instances of delay in registration reported by some Taxpayers despite successful Aadhar Authentication in accordance with Rules 8 & 9 CGST Rules, 2017.

c) The GSTN has issued an Advisory dated 8th March, 2024 giving information about Integration of E-way bill system with New IRP Portals.

d) The GSTIN has issued further Advisory dated 12th March, 2024 giving information about introduction of new 14A and 15A tables in GSTR-1/IFF.

C. FINANCE ACT, 2024

The Government of India has enacted the Finance Act, 2024 (Act no.8/2024 dated 15th February, 2024). The Finance Act is with relation to Finance Bill, 2024 (Bill no.14/2024 dated 1st February, 2024) (reported in the March 2024 issue of BCAJ).

D. ADVANCE RULINGS

57 Hostel vis-à-vis Renting of Residential accommodation
M/s. 2 Win Residency Ladies Hostel (AR Order No. 32/AAR/2023 dated 31st August, 2023 (TN)

The applicant has submitted that they are providing best hostel facilities to college female students and also to working women as most of the students and working people travel far and wide from their remote villages. The total charges collected for lodging ranges between ₹66 per day to ₹100 per day. Thus, the monthly tariff per student or per inmate ranges between ₹2,000 to ₹3,000 per month per inmate. They provide single-room occupation or double-room sharing or dormitory style of accommodation and rates vary accordingly.

The applicant has raised following questions:

“(1) Whether the hostel and residential is required accommodation extended by the Applicant hostel would be eligible for exemption under Entry 12 of Exemption Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017 and under the identical Notification under the TNGST Act, 2017 and also under Entry 13 of Exemption Notification No.9/2017 – Integrated Tax-Rate dated 28th June, 2017 as amended?

(2) Whether the Applicant hostel being eligible for exemption under Sl. No. 12 of Notification-12/2017 (CT-Rate) dated 28th June, 2017 as amended would at all be required to take registration under the GST Enactments by virtue of the Exemption Notifications as afore-mentioned and also under the provisions of Section 23 of the CGST/TNGST Act, 2017?

(3) Whether any specific tariff entry is applicable to hostels under the Tariff Notification in the event of requirement of registration?

(4) Whether, in the event of the hostel accommodation being an exempt activity, the incidental activity of supply of in-house food to the inmates of the hostel would also be exempt being in the nature of a composite exempt supply?

(5) Whether the judgement of the Division Bench of the Hon’ble Karnataka High Court in the case of Taghar Vasudeva Ambrish – vs- Appellate Authority for Advanced Ruling, Karnataka reported in Manu/KA/0327/2022 — 2022-VIL-110-KAR is applicable to the facts of the applicant?”

The Applicant has interpreted its version on premises, that they have licence to run the residential hostel for boarding and lodging under Section 5 of the Tamilnadu Hostels and Home for women and children (Regulation Act 2014) [hereinafter referred to as the “Hostel Regulation Act”].

Applicant also made reference to definition in Section-2 (e) of the ‘Hostels Regulation Act’ which defines “Hostel” or “Lodging House” to mean “a building in which accommodation is provided for women or children or both either with boarding or not”. Further the term “Home for Women & Children” is defined in section-2 (d) to mean “an institution, by whatever name called, established or maintained or intended to be established or maintained for the reception, care, protection for welfare of women or children or both”: Reference also made to similar provisions in other Acts.

The applicant also referred to Entry No. 12 of Exemption Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017 which reads as follows:

Reference is also made to amendment in above notification by Notification under TNGST Act, 2017, Notification 15/2022- Central Tax (Rate) dated 30th December, 2022 whereby an Explanation is inserted in Column-3 against Entry 12 which reads as follows:

“Explanation — For the purpose of exemption under this entry this entry shall cover services by way of renting of residential dwelling to a registered person where the registration person is Proprietor of a Proprietorship concern and rents the residential dwelling in his personal capacity for use as his own residence and to such renting is on his own account and not that of the proprietorship concern.”

Applicant submitted that the occupants or the inmates of the residential hostel are either students or working women who are not registered persons under the GST Enactments and hence the activity of applicant is covered by above exemption notification.

Reference also made to certain judicial pronouncements.

The revenue also gave elaborate reply including that the applicant is rendering services by way of renting of immovable property with a business motive for pecuniary benefit and these services are classified under Heading 9963 (Accommodation, food and beverage services) and hence taxable.

The ld. AAR analyzed the submission of both sides and observed that the term “residential dwelling” has not been defined either under CGST Act or under Notification No. 12/2017.

It was further observed that, generally, renting of residential dwelling involves letting out any building or part of the building by a lessor to a person or family (related persons) against a rent for using rooms which form part of a house as kitchen, bedroom, and living room etc., on the whole as residence. The ld. AAR also observed that a common understanding of the term “residential dwelling” is one where people reside treating it as a home and renting of residential dwelling does not include amenities like food, housekeeping, or laundry etc. In comparison, the ld. AAR observed that a hostel is an establishment which provides living accommodation to a specific category of persons such as students and workers, and it is with intention of providing hotel accommodation which is more akin to sociable accommodation rather than what is typically considered as residential accommodation.

With reference to various licences held by the applicant, the ld. AAR observed that the above provisions are not mandatory or applicable to a typical residential building or “residence dwelling for use as residence”, whereas it is mandatory for a hostel building. In view of above, the ld. AAR observed that the hostel building cannot be considered as residential dwelling but a non-residential complex.

The applicant had strongly placed reliance on the decision of the Hon’ble High Court of Karnataka in the case of Taghar Vasudeva Ambrish vs. Appellate Authority for Advance Ruling, dated 7th February, 2022 – 2022-VIL-110-KAR, wherein it is held that hostel is a residential dwelling and since it is used for residence, the assessee is eligible for exemption. However, the ld. AAR observed that Special Leave Petition (Civil) No. 29980/2022 has been filed against this order before the Hon’ble Supreme Court of India, and the case is pending for disposal.

Therefore, ld. AAR ruled that exemption is not eligible to the applicant.

Regarding classification the ld. AAR held that the hostel accommodation service will be covered under Tariff heading 9963 and is taxable @ 18 per cent under Sl. No. 7(vi) of the Notification No. 11/2017, Central Tax (Rate), dated 28th June, 2017, as amended vide Notification No. 20/2019 – Central Tax (Rate) dated 30th September, 2019.

Regarding question 4, the ld. AAR held that it is not covered by section 97(2) and hence, no ruling is given.

58 Blocked ITC
M/s. VBC Associates (AR Order No. 06/2022/AAAR dated 13th<s/sup> October, 2023 (TN)

Appellant had filed application for AR as under:

“Whether the input tax credit on solar power panels procured and installed is a blocked credit under Section 17(5) (c) and (d) of CGST/ TNGST Act, 2017”.

The ld. AAR vide order No.33/AAR/2022 dated31st August, 2022-2022-VIL-257-AAR has ruled as follows:

“The applicant is not eligible for claim of Input Tax Credit, as per Section 17(2) of the CGST /TNGST Act read with Rule 43(a) of CGST /TNGST Rules 2017, on the Goods/Services used in installation of Solar Power Panels, which are considered as Plant and Machinery.”

The appeal is filed by Tax payer appellant with following grounds:

“> that the original authority exceeded the scope of the question and concluded that Appellant is not eligible to claim ITC under Section 17(2) of CGST Act read with rule 43(a) of CGST Rules 2017;

> that the original authority ignored documents placed (tax invoice etc.,) which evidenced that tax was discharged on the component of electricity recovered from tenants and incorrectly holding that electricity is exempt supply under Notification 2/2017-CT(R);

> that rather than delivering a ruling on the question of blocked credit, the original authority exceeded its jurisdiction in delivering a ruling on apportionment of credit in terms of Section 17(2).”

Based on the above, the appellant had prayed that the AAAR may pass an appropriate order.

The ld. AAAR observed that the Appellant is engagedin the business of maintenance of an immovableproperty in Chennai, have procured, erected and commissioned Solar Power Panels for generation of electricity at their additional place of business at R. Kombai Village, Kujilyambarai Taluka, Dindigul District, Tamil Nadu.

The ld. AAAR also observed that the question raised indicates that the intention of appellant is to claim the ITC on the inputs / input services used in the setting up of Solar Power Plant for generation of electricity at their above additional place of business, in relation to their taxable outward supply viz: maintenance of an immovable property at Chennai.

The ld. AAAR also observed that the main ground of appeal is that the AAR had exceeded its jurisdiction in delivering a ruling on apportionment of credit in terms of Section 17(2) of the CGST Act, 2017, rather than delivering a ruling on the question of blocked credit under section 17(5)(c)/(d).

In this respect, the ld. AAAR observed that section 97(2) of GST Act envisages the specific aspects / subjects in respect of which questions seeking Advance Ruling could be raised before the AAR. The ld. AAAR observed that the subject matter is covered by clause (d) of the Sec. 97(2) of the Act i.e.: “admissibility of input tax credit of the tax paid or deemed to have been paid”. The ld. AAAR, therefore, felt that the said provision does not provide for examination about the inadmissibility of Input Tax Credit under a particular sub-section of the Act relating to Input Tax Credit. The ld. AAAR expressed its view that while a particular sub-section of the Act may or may not allow / disallow the ITC in relation to a specific supply, but may be inadmissible for a given input supply under other provisions of the Act. Since in this case, the ITC is not admissible ab initio, on the goods / services used for erection and commissioning of the Solar Power plant in terms of the Sec. 17(2) of the Act, the ld. AAAR held that the AR given by AAR is correct.

In this relation, the ld. AAAR also made reference to section 17(5)(c) and observed that the said section is not applicable to facts of appellant as the claim is for ITC on solar power panel and not on works contract services.

The ld. AAAR also held that Sec. 17(5) (d) is also not attracted as it applies when ITC is not available on goods or services or both (being inputs) received by a taxable person for construction of immovable property, and in the case of appellant, there is no case of construction of immovable property.

The ld. AAAR held that non-application of section 17(5)(c)/(d) does not mean that the ITC is eligible and it may be hit by other provisions, in this case by section 17(2).

With the above discussion, in respect to the ground that the AAR has exceeded its jurisdiction, the ld. AAAR observed as under:

“8.3 To sum up, as the Appellants are not supplying works contract service for construction of an immovable property and since such their activity does not fall within the ambit of the Section 17(5)(c) or (d) of CGST Act, 2017, the question whether ITC is blocked or otherwise, in terms of the said provisions, does not arise at all and the issue raised before the AAR was totally irrelevant. Moreover, the issue raised is extraneous to provide a ruling, as it is not within the scope of Section 97(2)(d) of the Act i.e. admissibility of input tax credit.”

The ld. AAAR also observed the merits of the admissibility vis-à-vis section 17(2).

The ld. AAAR has referred to facts of transactions. The claim of appellant was that he is supplying Electricity generated by his Solar Panel to tenants as part of maintenance. However, the ld. AAAR noted that the appellant is merely receiving money as reimbursement of upfront payment of the bill paid by it to the Electricity Board. The ld. AAAR observed that so far as electricity generated by appellant is concerned, it is supplied to TN Electricity Board which is exempt supply and hence, ITC on Solar panel is not eligible as per Section 17(2). The appeal is dismissed by ld. AAAR.

59 Classification and applicable rate of tax on ‘Raula Gundi’
M/s. Das and Sons (Order No. 03/ODISHA-AAR/2022-23 dated 22nd November, 2022 (Odisha)

The facts are that the applicant’s principal place of business is at Mochinda, Salbani, Dist- Keonjhar, Odisha, and he is engaged in manufacturing of “Raula Gundi” (Chewable Gundi, final product) and supplying the same to various betel shops, grocery shops, tea shops etc. under the cover of GST invoices.

Applicant further explained that in preparation of “Raula Gundi”, he purchases different raw materials like tobacco dust, bhajadhania, madhuri, mala zira, mustard oil, epoil, lime etc.

The applicant also explained the manner of production of above product as under:

“a) Tobacco dust is added with lime and Mustard oil and mixed properly.

b) After being mixed, other ingredients like Dhania, Pan madhuri, Mala zira, Epoil Cinnamon & Clove etc. are added to the mixture to prepare the finished product i.e. Raula Gundi.”

The product is sold in the market in 500 gm, 10 gm and 50 gm packets.

he Applicant has requested AAR to consider the product “Raula Gundi” to be classified under HSN Code 24039920, and the applicable GST Rate at 28 per cent (14 per cent CGST & 14 per cent SGST) along with GST Cess @72 per cent.

In hearing, the department representative submitted that the product “Raula Gundi” is classifiable under Tariff Heading 24039910 considering that the predominant ingredient is Tobacco in the making of the Chewable Gundi (Raula Gundi). It was of the opinion that the tax rate of the product “Raula Gundi” which is Chewing Tobacco is 28 per cent (CGST-14 per cent + SGST-14 per cent) and Cess-160 per cent.

The ld. AAR observed about the nature of product as under:

“4.5 We see that the resultant product of the applicant is a combination of various ingredients/raw materials intended for chewing needs and the predominant ingredient is ‘Tobacco dust’ which constitutes about 50 per cent of the product and other ingredients are added to it as per required proportion to make it consumable a. In the process of manufacturing the product, the raw materials used by the Applicant undergo a set of processes and emerge as ‘Chewable Tobacco Gundi’ which is marketable/ consumable. Therefore, the product prepared and sold by the Applicant is a “Manufactured Tobacco product for chewing”. Once it is held that the product is ‘Manufactured Chewing Tobacco’, the classification of the product is under HSN Code 24039910 which specifies ‘Chewing Tobacco’ under the head “2403-Other manufactured tobacco”. The very purpose of consuming this combination is that it has both stimulant and relaxation effects, but regular consumption of the same leads to addiction. It is believed to produce a sense of euphoria in the body which is akin to that of smoking. On this analogy and on common parlance, we would like to consider the product ‘Raula Gundi’ i.e. chewable gundi as ‘Chewing Tobacco’, the principal/ predominant ingredient of which is Tobacco.”

The ld. AAR also referred to Tariff of Chewing Tobacco in HSN and has reproduced the same in AR. With reference to said Tariff also the ld. AAR considered the product as covered by 24039910 as Chewing Tobacco.

In view of above, the ld. AAR held the product as covered by HSN 24039910 liable to GST at 28 per cent plus 160 per cent cess.

60 Classification of service — Agricultural activity or not
M/s. Raj Mohan Seshamani (Trade Name: Sustainable Green Initiative) (App. Case No. 03/WBAAAR/APPEAL/2022
dated 22nd September, 2022 (WB)

The applicant has entered into agreement with M/s One Tree Planted. As per ‘Project details’ of the said agreement, the aim of the project is “to enhance biodiversity and re-establish ecosystem function to protect the islands and the populace from erosion. While this reforestation activity will offer an immediate economic stimulus, it will also help protect important livelihood functions of local communities while addressing climate adaptation benefits and addressing climate change impact.

In view of the above agreement, the appellant has carried out following activities.

“i) Initially, the land identification is made for the plantation of mangrove seeds & seedlings.

ii) Thereafter, trenches are dug on identified areas fortnight in advance to allow sedimentation for planting of the mangrove seeds, propagules and seedlings.

iii) The seeds are then collected from the mud lands or water bodies nearby. Sometimes, as per requirement of different species of mangroves, survivability is checked in nearby nurseries.

iv) Planting of Seeds & seedlings in the land identified and allotted by State Governments and also by the local people.

v) Local people are engaged for planting activity of these seeds and seedlings into the trenches. Planting activity is done during monsoons and low tide.

vi) Post plantation of seeds and seedlings, local people are engaged to safeguard the fenced areas and mangroves are monitored for 3 to 5 years to ensure survival.

vii) Periodic re-planting is done to make up for plant mortality.”

Based on above, the appellant had posed following questions before ld. AAR.

“What would be SAC Code & GST Rate for the outward supply made by the applicant, in case of mangroves being cultivated and nurtured at coastal communities?”

The appellant was of view that the above-described activity should be covered under Sl. No. 24 of the Notification No. 11/2017- Central Tax (Rate) dated 28th June, 2017 having SAC 9986 and therefore, shall attract Nil rate of tax.

The ld. AAR had observed that the appellant does not provide such services for food, fibre, fuel, raw material or other similar products or agriculture produce but the sole object of the services is to enhance biodiversity and re-establish ecosystem function to protect the islands and the populace from erosion.

Therefore, the ld. AAR disagreed with appellant and ruled as under:

“Supply of services for plantation of mangrove seeds and seedlings in coastal areas shall be covered under Sl. No. 32 of Notification No. 11/2017- Central Tax (Rate) dated 28/06/2017 having SAC 9994 and therefore shall attract tax @ 18 per cent (CGST @ 9 per cent + WBGST @ 9 per cent or IGST @ 18 per cent).”

This appeal is filed against above AR.

The challenge was made on various grounds, including the meaning of ‘agriculture’ as per Hon. Supreme Court, the overall effect of activity on Society and benefit of it to society.

The ld. department representative submitted that the appellant is doing activity only upon receiving a contract and it does not support services for food, fibre, fuel, raw material or other similar products or agricultural produce.

Based on the above propositions, the ld. AAAR observed that the appellant has entered into contract with foreign organizations for plantation of mangrove seeds and seedlings in coastal areas of the country with the sole purpose of enhancing biodiversity and re-establish ecosystem function to protect the islands and the populace from erosion.

The ld. AAAR concurred with department that ‘support services to agriculture, forestry, fishing, animal husbandry’ is applicable only if it is relating to cultivation of plants and rearing of all life forms of animals, except the rearing of horses, for food, fibre, fuel, raw material or other similar products.’

Since in present case, the appellant is engaged in business of cultivation, planting and nurturing of mangrove seeds and seedlings for the primary purpose of environmental protection by way of enhancing biodiversity and re-establishing the ecosystem functions and such services are not related to cultivation of plants for food, fibre, fuel, raw material or other similar products, the ld. AAAR justified the AR and dismissed the appeal.

61 GST liability on charges exceeding ₹7,500 in case of RWA
M/s. Prinsep Association of Apartment Owners (Case No. WBAAR-21 of 2023
dated 31st August, 2023 (WB)

The applicant is an Association of Persons (AOP, for short) registered with Association of Apartment Owners under the West Bengal Act XVI of 1972, whose primary functions are to:

(i) raise funds;

(ii) provide for maintenance, repair and replacement of the common areas and facilities of the property and payments thereof;

(iii) provide for proper maintenance of accounts;

(iv) provide for and do any other thing for the administration of the property in accordance with the Act and bye-laws.

The questions raised before AAR are as under:

“(1) Where monthly contribution charged to a member exceeds INR 7500 per month, whether the applicant can avail the benefit of Notification No. 12/2017 dated 28.06.2017 (Sl. No. 77) read with Notification No. 02/2018 dated 25.01.2018 which provide for exempting from tax, the value of supply up to an amount of R7,500 per month per member? In other words, whether tax would be charged over and above INR 7,500 or the total amount collected from members.

(2) Whether applicant is liable to pay CGST/SGST on amounts which it collects from its members for setting up a corpus fund for future contingencies / major CAPEX. Whether such fund from members will come under the definition of supply and liable to be taxed?

(3) Whether the applicant is liable to pay CGST/SGST on collection of common area electricity charges paid by the members and the same is recovered on the actual electricity charges?”

In respect of exemption up to ₹7500, applicant referred to definition of ‘supply’ given in section 7 as also entry 77 in above notification no.12/2017 read with notification no.2/2018. It was submitted that due to above legal position the supply of services by RWA (unincorporated body or a registered non-profit entity) to its own members by way of reimbursement of charges or share of contribution up to an amount of ₹7,500 per month per member is exempt from payment of tax and only amount in excess of ₹7500 is taxable.

The judgement of Hon. Madras High Court in case of Greenwood Owners Association vs Union of India [2021] 128 taxmann.com 182 (Madras) — 2021-VIL-523-MAD cited, wherein the Hon’ble Court has held that exemption up to ₹7,500 is available and only amount in excess of ₹7,500 is liable to GST.

Regarding contribution to corpus fund the applicant referred to definition of ‘goods’ and ‘service’ and sought to argue that where members of Association contribute such money as Corpus Fund (other than monthly/Quarterly maintenance) for future contingencies or development of Society, the same is transaction in money and not liable to GST.

In relation to common electricity charges, it was submitted that the same is recovered on actual basis and hence the same should be kept out of purview of GST. Reliance placed on the advance ruling given by the Telengana Authority for Advance Ruling in the case of Jayabheri Orange County Owners Association – 2022-VIL-158-AAR.

The revenue opposed all above submissions.

The ld. AAR referred to clarification given by the Tax Research Unit, Department of Revenue, Ministry of Finance vide Circular No.109/28/2019-GST dated 22.07.2019 [West Bengal Trade Circular No. 30/2019 dated 31.07.2019] in which the above issue, whether tax is payable only on the amount exceeding ₹7,500 or on the entire amount of maintenance charges, is clarified as under:

“The exemption from GST on maintenance charges charged by a RWA from residents is available only if such charges do not exceed ₹7,500 per month per member. In case the charges exceed ₹7,500 per month per member, the entire amount is taxable. For example, if the maintenance charges are R9,000 per month per member, GST @18 per cent shall be payable on the entire amount of ₹. 9,000 and not on [₹9,000 – ₹7,500] = ₹1,500.”

The ld. AAR also made reference to comments of the Fitment Committee from the Agenda for the 25th GST Council Meeting, where in the proposal is fixed for exemption up to ₹7500 on the basis that the person paying more than above limit can afford payment of GST.

Regarding the judgment of Madras High Court in Greenwood Owners Association, the ld. AAR noted that the matter is before the Division bench in an appeal petition filed by the Department in case of Union of India vs. M/s TVH Lumbini Square Owners Association.

Based on the above findings, the ld. AAR held that the tax is payable on the whole amount.

Regarding the tax on corpus fund (also referred to as sinking fund), the ld. AAR observed that sinking fund is created in order to meet future contingencies, e.g., to meet the expenses for structural repairing, reconstruction work, etc. It is observed that the members contribute to the sinking fund with an agreed condition that the RWA will provide some specific services in future, as and when required out of the said fund.

Accordingly, the ld. AAR held that the amount collected by the applicant from its members towards sinking fund is only meant for meeting expenses for future supply of services and, therefore, they cannot qualify as a deposit. Accordingly, such a collection was held taxable.

Regarding collection of electricity charges, the ld. AAR referred to Circular No. 206/18/2023-GST dated 31st October, 2023 in which it has been clarified that where the electricity is supplied by the Real Estate Owners, Resident Welfare Associations (RWAs), Real Estate Developers etc., as a pure agent, it will not form part of value of their supply. Further, when they charge for electricity on an actual basis, that is, they charge the same amount for electricity from their lessees or occupants as charged by the State Electricity Boards or DISCOMs from them, they will be deemed to be acting as a pure agent for this supply.

The ld. AAR observed that in the present case, the applicant collects the electricity charges consumed for the common area from its members on a pro-rata basis and the amount collected on account of consumption of electricity has not been shown separately in the said invoice. Accordingly, the ld. AAR held that electricity is supplied bundled with supply of goods and services sourced from a third person for the common use of its members, and it forms a part of composite supply where the principal supply is the supply of common area maintenance services. Accordingly, the ld. AAR held that such collection is liable to GST.

Accordingly, all three questions ruled against the applicant.

Recent Developments in GST

A. NOTIFICATIONS

1. Notification No.01/2024-Central Tax dated 5th January, 2024

The above notification seeks to extend the due date for furnishing return in Form GSTR-3B for the month of November, 2023 till 10th January, 2024, for registered persons in certain districts of Tamil Nadu.

2. Notification No.02/2024-Central Tax dated 5th January, 2024

The above notification seeks to extend the due date for furnishing annual return in Form GSTR-9 & Form GSTR-9C for financial year 2022-2023 till 10th January, 2024, for registered persons in certain districts of Tamil Nadu.

3. Notification No.03/2024-Central Tax dated 5th January, 2024

By above notification, the earlier notification no.30/2023-CT dated 31st July, 2023 which was seeking information on various issues in relation to notified items in said notification like Tobacco and its products, is rescinded with effect from 1st January, 2024.

4. Notification No.04/2024-Central Tax dated 5th January, 2024

By above notification, a special procedure to be followed by registered person engaged in manufacturing of certain goods mentioned in the notification like Pan Masala and tobacco products, is prescribed w.e.f 1st April, 2024.
The information is sought of various items in the given forms.

5. Notification No.05/2024-Central Tax dated 30th January, 2024

By above notification the earlier notification no.2/2017-CT dated 19th June, 2017 which is relating to allotment of authority, is amended and one more Pin code is added in sr.no.83 in Table II.

B. ADVISORY / INSTRUCTIONS

a) The GSTN has issued Advisory dated 15th January, 2024 giving information about introduction of new Tables 14 & 15 in GSTR-1/FF.

b) The GSTN has issued Advisory dated 23rd January, 2024 by which information is given about furnishing of bank account details under Rule 10A of CGST Rules, 2017.

c) The GSTN has also issued Advisory dated 19th January, 2024 giving information about payment through Credit card (CC) / Debit Card (DC) and Unified Payments Interface (UPI).

C. FINANCE ACT, 2024

The Government of India has introduced Finance Bill, 2024 (Bill no.14/2024 dated 1st February, 2024). Amongst others, amendments are proposed in the GST laws in respect of definition of “Input Service Distributor” and in respect of manner of distribution of credit by “Input Service Distributor”. There is also a proposal to introduce section 122A to provide a penalty where the special procedure, prescribed in respect of certain goods, is not followed.

D. ADVANCE RULINGS

53 Local authority vis-à-vis Governmental authority

Indian Hume Pipe Company Ltd.

(A. R. No. UP ADRG 12/2022

dated 23rd September, 2022) (UP)

The applicant, M/s. Indian Hume Pipe Company Ltd. is a registered assessee under GST.

The applicant has sought Advance Ruling on following issues:

“a. Whether the supply of Services by the Applicant to M/s. UTTAR PRADESH JAL NIGAM is covered by Notification No. 15/2021 Central Tax (Rate), dated 18th November, 2021 r/w. Notification No.22/2021- Central Tax (Rate), dated 31st December, 2021.

b. If the supplies as per Question are covered by Notification No. 15/2021- Central Tax (Rate), dated 18th November, 2021, r/w. Notification No. 22/2021- Central Tax (Rate), dated 31st December, 2021, then what is the applicable rate of Tax under the Goods and Services Tax Act, 2017 on such Supplies made w.e.f. 1st January, 2022; and

c. In case the supplies as per Question are not covered by the Notification supra then what is the applicable rate of tax on such supplies under the Goods and Services Tax Act, made w.e.f. 1st January, 2022.”

In support, the applicant submitted that it undertakes Contracts for Construction of Head works, Sumps, Pump Rooms, laying, jointing of pipe line and commissioning and maintenance of the entire work for Water Supply Projects / Sewerage Projects/ Facilities.

It was further submitted that it has been awarded a contract by M/s. Uttar Pradesh Jal Nigam (UPJN) vide Department Letter No. 130/Vividh-13/11 dated 25th February, 2021.

It is informed that UPJN holds PAN AAALU0256C under the Income Tax Act, 1961 and GSTIN 09AAALU0256C320 under the Goods & Services Tax Act, 2017.

The applicant also provided history of establishment of UPJN as under:

“Public Health Engineering Department was created in 1927 to provide drinking water supply and sewerage facilities in Uttar Pradesh. In year 1946, it was rechristened as Local Self Government Engineering Department (LSGED). In 1975, it was converted to Uttar Pradesh Jal Nigam through Uttar Pradesh Water Supply and Sewerage Act, 1975 (ACT no-43, 1975). As per this Act, Jal Nigam has jurisdiction over whole Uttar Pradesh (except Cantonment Area). The basic objective of creating this Corporation is development and regulation of water supply & sewerage services and for matters connected therewith.”

In Notification No. 31/2017 dated 13th October, 2017 the meaning of the terms Governmental Authority and Government Entity is given as under:

“Governmental Authority” means an authority or a board or any other body (i) set up by an Act of Parliament or a State Legislature; or (ii) established by any Government, with 90 per cent or more participation by way of equity or control, to carry out any function entrusted to a Municipality under article 243W of the Constitution or to a Panchayat under article 243 G of the Constitution.

“Government Entity” means an authority or a board or any other body including a society, trust, corporation, i) set up by an Act of Parliament or State Legislature; or ii) established by any Government with 90 per cent or more participation by way of equity or control, to carry out a function entrusted by the Central Government, State Government, Union Territory or a local authority.”

The applicant submitted that the character in PAN denotes the Status of the PAN holder and as the 4th character in the case of UPJN is “L”, it denotes Local Authority.

In GSTIN 09AAALU0256C320 and in the Registration Certificate issued by the GST Department, the UPJN is shown under Local Authority.

It was submitted that UPJN is a Local Authority in light of above facts and hence it is covered by Notification No. 15/2021 Central Tax (Rate) dated 18th November, 2021 r/w. Notification No. 22/2021- Central Tax (Rate), dated 31st December, 2021; wherein Composite supply of works contract as defined in clause (119) of Section 2 of the Central Goods and Services Tax Act, 2017, supplied to Central Government, State Government, Union territory or a local authority are covered for concessional rate of 12 per cent.

Accordingly, it was canvased that the transaction with UPJN is liable to tax under the GST Act @ 12 per cent;

The ld. AAR observed that the questions raised by the applicant require examination as to whether the UPJN is a local authority or not?

The ld. AAR observed that the applicant has arrived at the conclusion that UPJN is local authority on the basis of the 4th character of PAN of UPJN and in GSTIN of UPJN it is shown as ‘local authority’.

The ld. AAR observed that UPJN was created by the Government of Uttar Pradesh by enacting the U.P. Water Supply and Sewerage Act, 1975 (hereinafter referred to as the UPWSS Act). It is a body corporate having perpetual succession and a common seal and capable of suing and being sued in its name. It has power to acquire, hold and dispose of the property.

It has a specific administrative set up including functionalities like Chairman appointed by State Government and has also Nigam Fund deemed to be Local fund. The ld. AAR also referred to the meaning of ‘Local Authority’ given in section 2(69) of CGST Act.

The ld. AAR observed that for the purpose of the GST Laws, any authority legally entitled to or entrusted by the Government with the control or management of a municipal or local fund, qualifies as a “local authority”.

The ld. AAR also referred to meaning of ‘local authority’ contained in Section 3(31) of the General Clauses Act, 1897, which is as under:

“’local authority’ shall mean a municipal committee, district board, body of port Commissioners or other authority legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund.”

The ld. AAR referred to the judgment of the Hon. Supreme Court in the case of Union of India vs. R.C. Jain (1981) 2 SCC 308 – 1981-VIL-21-SC-MISC wherein the scope of the term local authority under the General Clauses Act is explained.

The ld. AAR observed that so far as UPJN is concerned, it is not satisfying some of the conditions mentioned in above judgment for qualifying as “local authority”.

The ld. AAR also observed that the main requirement to qualify as a local authority is that the authority must be legally entitled to or entrusted by the Government with the control and management of a Municipal or local fund. In the case of UPJN, there is no local fund entrusted by the Government with UPJN.

In view of the above material, the ld. AAR observed that the UPJN is not a ‘local authority’.

The ld. AAR thereafter observed as to whether UPJN is Governmental Authority. In this respect, the ld. AAR referred to Notification no.11/2017 31/2017-Central Tax (Rate) dated 13th October, 2017, which amended the Notification No 11/2017 – Central Tax (Rate) dated 28th June, 2017, in which Governmental Authority is explained as under:

“ix. Governmental Authority” means an authority or a board or any other body, – (i) set up by an Act of Parliament or a State Legislature; or (ii) established by any Government, with 90 per cent, or more participation by way of equity or control, to carry out any function entrusted to a Municipality under article 243W of the Constitution or to a Panchayat under article 243 G of the Constitution.” (iii)”

The ld. AAR observed that UPJN fulfils the condition of being ‘Governmental Authority’ as it is constituted for the development and regulation of water supply and sewerage services in the State of U.P. which is one of the works entrusted under Article 243 W read with Twelfth Schedule of the Constitution of India. Thus, the ld. AAR held that the UPJN is a government authority.

In view of the above, the ld. AAR gave a ruling that UPJN is not covered by Notification no.15/2021-Central Tax (Rate) dated 18th November, 2021 and the contract is liable to tax at 18 per cent from 1st January, 2022.

54 Healthcare Service vis-à-vis Service to Senior Citizen

Snehador Social & Healthcare Support LLP

(A. R. No. 18/WBAAR/2022-23

dated 22nd December, 2022) (WB)

The applicant is engaged in providing services for health care to senior citizens which covers arranging doctors, nurses, taking the clients to any diagnostic centre, supplying oxygen and physical support as per requirement of such senior citizens. For rendering all such services, the applicant runs a membership programme where clients opt for the same as per their requirement. In addition to this, the applicant also provides services to its members for delivery of medicines and grocery items at home, helping with bank work, utility bill payment, etc.

The applicant has made this application under sub section (1) of section 97 of the GST Act and the rules made there under seeking advance ruling as to “whether the services rendered by the applicant for health care to senior citizens at their doorstep comes under exemption category and what will be the classification of such services. Further, if such service is held taxable, then what would be the rate of tax.”

The applicant has elaborately explained the nature of services. Appellant was claiming that he is covered by entry 74 in Notification no.12/2017-CT (Rate) dated 28th June, 2017 which reads as under:

Sl. No. Chapter, Section, Heading, Group or Service Code (Tariff) Description of Services Rate (Per cent.) Condition 74
74 Heading

9993

 Services by way of – (a) health care services by a clinical establishment, an authorised medical practitioner or paramedics; Provided that nothing in this entry shall apply to the services provided by a clinical establishment by way of providing room [other than Intensive Care Unit (ICU)/Critical Care Unit (CCU)/Intensive Cardiac Care Unit (ICCU)/Neonatal Intensive Care Unit (NICU)] having room charges exceeding R5000 per day to a person receiving health care services.

(b) services provided by way of transportation of a patient in an ambulance, other than those specified in (a) above.

 Nil Nil

The ld. AAR noted contention of the applicant. The ld. AAR also referred to the meaning of ‘health care services’, ‘clinical establishment’ and ‘authorized medical practitioner’ as given in Para 2 (zg), 2(s) and 2(k) respectively of Notification No. 12/2017 Central Tax (Rate) dated 28th June, 2017.

The ld. AAR also noted the functions performed by applicant, which are as under:

  • Regular visits by a Personal Care Manager.
  • Home visits by General Physician, Physiotherapist, Clinical Therapist & Nutritionist.
  • Assistance in delivery of monthly grocery & medicine.
  • Utility Bill payments of Tax/ Financial or Legal consultation.
  • Digital assistance or Assistance with plumbers, electricians and repairs.
  • Regular member updates with video clips to be shared with family through individual login on its website.

Further, the applicant provides following services:

  • Accompanying members for essential & social outings.
  • Accompanying members to the Bank & Post Office.
  • Scheduling appointments and accompanying members for doctor consultations.
  • Organising annual health check-ups.
  • Accompanying member on diagnostic tests.
  • Escorting members on personal social outings.
  • Organising social gathering and entertainment programs.
  • Assistance with airport & railway pickup & drop.

In respect of medical services, ld. AAR observed as under:

“Services claimed to have been provided by the applicant also cover assistance in medical emergency and hospitalization which includes ambulance services, regular monitoring during hospitalisation, help with medical insurance and help with discharge formalities. The applicant provides medical and nursing support services at home for critically ill members in the following manner:

  • Procuring and setting up of all medical support equipment required at home.
  • Assisting with nursing support at home.
  • Critical care supervisor to visit home whenever necessary.
  • Scheduling doctor visits whenever necessary.”

After analysing services provided by the applicant as above, the ld. AAR observed that, “the applicant, as we have already discussed, is found to be engaged in providing services to its enrolled members under two limbs. The first one, which is against a consolidated package amount, comprises inter alia of care manager visit for medical checkup, general physician home visit and home delivery of medicine. The other part also covers services by general physicians, nurses and care managers for which the applicant charges separately. The aforesaid services may get covered under health care services as defined in Para 2 (zg) of Notification No. 12/2017 Central Tax (Rate) dated 28th June, 2017. However, supply by way of health care services qualifies for exemption under serial number 74 of Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017, if the same is provided by a clinical establishment, an authorised medical practitioner or para-medics. Admittedly, the applicant doesn’t fall under any of the aforesaid categories of suppliers and the services provided by the applicant, therefore, fail to qualify as exempted service.”

Accordingly, the ld. AAR held that the given service cannot fall in the exemption category of Sl. No.74 of Notification no.12/2017. The ld. AAR also held that services rendered by the applicant can be termed as ‘human health and social care services” and taxable @ 18per cent vide sr. no.31 of Notification no.11/2017-CT (Rate) dated 28th June, 2017.

55 Healthcare Service vis-à-vis Administration of COVID-19 Vaccine

Krishna Institute of Medical Science Limited

(Order No. AAAR/AP/ (GST)/2022

dated 19th December, 2022) (AP)

The appellant (original applicant) had raised certain questions before the ld. AAR and the ld. AAR has given its ruling in AAR No.04/AP/GST/2022 dated 21st March, 2022 – 2022-VIL-207-AAR. The questions raised by appellant were as under:

“Question: Whether administering of COVID-19 vaccination by hospitals is Supply of Good or Supply of Service?

Question: Whether administering of COVID-19 Vaccine by clinical establishments (Hospitals) qualify as “Health care services” as per Notification No. 12/2017 Central Tax Rate dated 28th June, 2017?

Answer: Administering of COVID-19 vaccination by hospitals is a Composite supply, wherein the principal supply is the ‘sale of vaccine’ and the auxiliary supply is the service of ‘administering the vaccine’ and the total transaction is taxable at the rate of principal supply i.e., 5 per cent.

Question: Whether administering of COVID-19 vaccination by clinical establishment is exempt under GST Act?”

Answer: Administering of COVID-19 Vaccine by clinical establishments (Hospitals) does not qualify under “Health care services” as per Notification No. 12/2017 Central Tax Rate dated 28th June, 2017 and not eligible for exemption.

The appellant has filed an appeal against above AR.

In appeal, appellant made submissions picking up various issues like;

  • The process of vaccination is supply of Service;
  • It is Healthcare services;
  • Why the supply should not be considered as Supply of Goods and elaborate the same.

After analysing the legal position, the ld. AAAR held that in the instant case, the applicant qualifies to be a clinical establishment but, the supply transaction is predominantly of sale of goods and not the service component of healthcare. The Ld. AAAR further observed that the dominant intention of the recipient is the receipt of the vaccine followed by its administration and hence the principal supply is supply of vaccine and not the process of vaccination.

The ld. AAAR held that there is no dispute that the appellant injects medicine in the body of the recipient. Therefore, the ld. AAAR observed that the claim of appellant that there is no transfer of goods is self-contradictory.

Regarding contention that the recipient cannot purchase vaccine, the ld. AAAR held that the purchase is through government regulation, but it cannot be said that it is not purchased. The ld. AAAR also referred to the price tag prescribed in notification by the Central Government, about the vaccine where the GST rate of 5 per cent is mentioned. The Ld. AAAR also referred to meaning of ‘Vaccination’ as under:

“In the present case, the service rendered by the appellant is administration of Covid-19 vaccine which is also called Vaccination or Immunization. In order to find out whether the service of administering a vaccine fits into the “Health Care Services” exempted vide Notification No.12/2017 Central Tax (Rate) dt. 28th June, 2017, we need to understand the term ‘Vaccination’. The definition of Vaccination as per the Centers for Disease Control and Prevention is as follows:

‘The act of introducing a vaccine into the body to produce protection from a specific disease.’

In the light of the above definition it is understood that vaccination provides protection against disease and it is administered before the advent of disease. The above discussed service of administering a vaccine does not fit into the definition of “Health Care Services” as per Notification No.12/2017 Central Tax (Rate) dated 28th June, 2017.”

The ld. AAAR observed that the definition of ‘healthcare service’ starts to post some medical issues but the one taken for protection of the future cannot be considered as healthcare service.

The ld. AAAR, thus, confirmed the AR in following terms:

“Finally, we confirm that exemption is not allowed in the instant case against the claim of the applicant. While validating the decision of the lower authority that taxability of the supply comes under ‘composite supply’, wherein the principal supply is the ‘sale of vaccine’ and the auxiliary supply is the service of ‘administering the vaccine’ and the total transaction is taxable at the rate of principal supply i.e., 5 per cent.’

56 Residential Property vis-à-vis Commercial use – forward charge

Deepak Jain

(AR No. RAJ/AAR/2023-24/14

dated 29th November, 2023) (Raj)

The facts are that Shri Deepak Jain (hereinafter referred to as the “Applicant”) is engaged in providing Professional service of Chartered Accountant and currently Senior Partner in B D Jain & Co. Chartered Accountants. Applicant is currently unregistered under GST Act 2017. Applicant is the owner (along with family members Shri Padam Chand Jain, Smt. Manju Devi Jain and Smt. Samta Jain hereinafter collectively referred to as “Lessor(s)”) of the property situated at J-10, Lal Kothi, Sahakar Marg, Jaipur, Rajasthan 302018 (hereinafter referred to as the Demised Premises). The applicant has entered into lease agreement dated 18th January, 2022 with Back Office IT Solutions Private Limited, which is inter alia engaged in the business of providing comprehensive, independent fund accounting, reporting, and analytics solutions to fund administrators providing administration services to hedge fund industry.

As per terms of the Lease agreement, in consideration of grant of lease to use and possess the aforesaid property, the lessee is required to pay to the applicant a monthly rent of ₹99,125/- (a total of ₹396500/- to the Lessors).

The contention of applicant was that Land use of property is residential as per the Lease deed issued by Jaipur development Authority (JDA), Jaipur, in the respect of the Demised premises.

However, the applicant also clarified that as per the Lease Agreement, the Demised Premises shall be used solely
for commercial purposes by the Lessee i.e. for establishing the branch/office of the Lessee and hence Construction
of property is done for use as commercial purposes only.

Lessee is registered in GST Act and Electricity connection Category of Lessee is “medium industry”.

The applicant has also provided further specification of property. The property is equipped with all requirements for commercial purposes.

The applicant was of the opinion that the renting of residential dwelling is included under RCM services when provided to a registered person. Reference made to notifications No. 04/2022-Central Tax (Rate) dated the 13th July, 2022 and notification No. 05/2022-Central Tax (Rate) dated the 13th July, 2022, which are also reproduced below for ready reference.

Before 18th July, 2022 From 18th July, 2022
Exemption for Renting of Residential Dwellings Services by way of renting of residential dwelling for use as a Residence. Services by way of renting of residential dwelling for use as a residence except where the residential dwelling is rented to a registered person.

Inclusion in list of services under Reverse Charge Mechanism: Following new Entry for Reverse Charge Tax by notification No. 05/2022-Central Tax (Rate) dated 13th July, 2022 inserted with effect from 18th July, 2022 in notification No. 13/2017-Central Tax (Rate), dated 28th June, 2017:

(1) (2) (3) (4)
Sl. No. Category of Supply of Service Supplier of Service Recipient of Service
“5AA Service by way of renting of residential dwelling to a registered person. Any person Any Registered person”;

Based on the above facts following questions were raised.

1. Whether the Demised premises will be covered in the definition of residential dwelling for the purpose of notification No. 05/2022-Central Tax (Rate) dated 13th July, 2022?

2. Out of the following, which are factors important to include in the definition of residential dwelling?

1. Land use of property by local authorities; or

2. Layout of the property, its structure, whether it is designed for usage as a residential unit or a commercial unit; or

3. The purpose for which the dwelling is put to use; or

4. How is the plan of the property sanctioned by the local authorities; or

5. The intention of the developer / owner of the property; or

6. The length of stay intended by the users; or

7. Electricity Bill; and

8. Municipal Tax.

The ld. AAR observed that the definition of Residential dwelling is not mentioned in GST Law. The ld. AAR referred to meaning in Black’s Law Dictionary, as under:

“‘Residential dwelling means living in a certain place permanently or for a considerable length of time’. As per the Merriam Webster dictionary: ‘A shelter (as a house) in which people live’. As per the Oxford dictionary: ‘A house or apartment or other places of residence or a place to live in or building or other places to live in’.”

The ld. AAR observed about important aspects as under:

“Point 4 (a) of the Lease Agreement entered between the Applicant (Lessor) and Lessee i.e. M/s Back Office IT Solutions Pvt. Ltd. (a company incorporated in India within the meaning of Companies Act, 1956), stipulates that the demised premises shall be used solely for commercial purpose by the lessee i.e. for establishing the branch/office.”

Also on perusal of Electricity Bill issued in the name of lessee i.e. Back Office IT Solutions Pvt. Ltd. At J-10, 1 Block, Lal Kothi Scheme, Sahakar Marg, Jaipur for the month of March 2023, it is evident that the electric connection has been issued for commercial purpose.

In view of the above, we have reached the conclusion that the property in question has been leased/rented for commercial use. So even if the use of said property has not been changed by JDA but since the so-called residential dwellings does not remain as such as it is being used for commercial purposes.”

Accordingly, the claim of applicant that it will fall under RCM in hands of lessee is rejected and the effect is that it will fall under forward charge being commercial purpose.

Based on above findings, the ld. AAR ruled as under:

“Q. 1 Whether the Demised premises will be covered in the definition of residential dwelling for the purpose of notification No. 05/2022-Central Tax (Rate) dated 13th July, 2022?

Ans-1. No, the demised premises will not be covered in the definition of residential dwelling in terms of Notification No. 05/2022-Central Tax (Rate) dated 13th July, 2022 as it is being used for commercial use.

Q. 2 Out of the following, which are the factors important to include in the definition of residential dwelling?

Ans-2. The important factors to be included in the definition of Residential Dwelling is the purpose for which the dwelling is put to use and the length of stay intended by the users.”

Goods and Services Tax

I. HIGH COURT

87 Sakthi Fashions vs. Appellate Authority / Additional Commissioner of GST(Appeals-II), Chennai

2024 (80) G.S.T.L 84 (Mad.)

Date of Order: 12th September, 2023

Time period from the application for revocation till the date of rejection shall be excluded while computing the limitation period as per section 107 of CGST Act, 2017 when an appeal is preferred against such order for cancellation of registration.

FACTS

The place of business of the petitioner was inspected and after verification of records, an SCN was issued for cancellation of registration. On failure to respond to the SCN, an Order-in-Original dated 6th February, 2023 was passed for cancellation of registration. Being aggrieved by the order, an application for revocation of cancelled registration was filed on 16th February, 2023 under section 30 of the CGST Act. Thereafter, another SCN was issued on 27th February, 2023. However, the petitioner failed to reply to the same and hence application for revocation of cancelled registration was rejected on 14th March, 2023. Further, an appeal against Order-in-Original was filed on 14th July, 2023 with a delay of 39 days and the same was rejected being time-barred in nature. Aggrieved, the petitioner sought writ petition before the Hon’ble High Court.

HELD

It was held that for the purpose of computing the limitation period as per Section 107 of CGST Act, period from application filed under Section 30 of CGST Act for revocation of cancelled registration to the rejection of said application i.e. from 16th February, 2023 to 14th March, 2023 was to be excluded. The Hon’ble High Court disposed of the writ petition directing the respondents to consider the petitioner’s appeal and pass orders on merits without reference to limitation and in accordance with the law.

88 Maa Kamakhya Trader vs. State of U.P.

2024 (80) G.S.T.L 39 (All.)

Date of Order: 16th October, 2023

Order passed based on invalid notice demanding tax and penalty under section 129(3) of CGST Act ought to be set aside.

FACTS

Petitioner’s vehicle transporting processed “white red betel” was intercepted on 18th September, 2023. It was found that an E-way bill and E-invoice of an incorrect product with different values were produced by the transporter on inspection. As a result, an order for detention was issued in Form GST MOV-06 and a notice in Form GST MOV-07 was issued demanding tax and penalty under section 129(3) of the CGST Act. Subsequently, an order in Form GST MOV-09 was passed. Aggrieved, a writ petition was filed by the petitioner before the Hon’ble High Court on the grounds that the notice issued under section 129(3) demanding both tax and penalty was not appropriate.

HELD

It was held that the impugned order in Form GST MOV-09 was to be quashed since the same was based on an invalid notice demanding tax as well as penalty. Accordingly, the matter was remanded back directing a fresh order to be issued under section 129(1)(a) of the CGST Act within a period of one week after providing an opportunity of hearing to the petitioner.

89 Technosys Security System Pvt. Ltd. vs. Commissioner of Commercial Taxes, Indore

2024 (80) G.S.T.L 4 (M.P.)

Date of Order: 5th December, 2023

The opportunity of a personal hearing should be provided even where it has not been specifically requested by the assessee and an adverse decision has been contemplated against him.

FACTS

Petitioner was issued show cause notices demanding an amount of ₹7.37 crores and ₹10.18 crores in two different cases. Subsequent to the reply filed for the said SCNs, final orders quantifying tax, interest and penalty amounting to ₹9.76 crores and ₹14.56 crores were issued without providing opportunity for personal hearing and in violation of principles of natural justice mandated as per section 75(4) of CGST Act. Aggrieved, a petition was filed before the Hon’ble High Court.

HELD

It was held that the contention of the respondent that section 75(4) of the Act uses the term “opportunity of hearing” and the word ‘personal’ is missing, hence, filing a reply to SCN amounts to an opportunity of hearing; was not sustainable. The Court further relied upon the decision of Allahabad High Court in case M/s. B.L. Pahariya Medical Store (supra) [2023 (77) GSTL 193 (All.)] and held that section 75(4) of CGST Act clearly specifies that opportunity of hearing should be granted where there is a specific request in writing or where any adverse decision is contemplated. Since no opportunity for a personal hearing was granted, impugned orders were liable to be set aside without going into the merits of the case.

90 Prahitha Construction (P.) Ltd vs. UOI

[2024] 159 taxmann.com 437 (Telangana)

Date of Order: 9th February, 2024

Transfer of development rights held amenable to GST and not covered by Entry 5 of Schedule-III of the GST Act. However, Hon. Courts hold that Notification No.4 of 2018 dated 25.01.2018 as amended does not create a charge on the transfer of development rights but only provides for the time of payment of tax. Supply of services of transfer of development rights was always taxable since the introduction of GST.

FACTS

The petitioner a construction company challenged Notification No.4/2018-CT dated 25th January, 2018 (as amended vide Notification No.23/2019 dated 25th January, 2019) imposing GST on a transfer of development rights of land done by land owners under joint development agreement (JDA) contracted as ultra vires the constitution of India. As per the petitioner, the JDAs are normally entered enabling the land owners to sell the land and procure residential or commercial apartments in lieu of such sale and hence the JDAs are to be viewed as conveyance as is expected in other laws. The respondent department referred to the clauses of the agreement to contend that the JDA has a clear indication that there is no outright sale of property in the name of the developer. Rather, it is a case where the conditions would clearly indicate that the ownership and the title rights are all retained by the land owner himself and the only role which the developer has is the execution of JDA so far
as developing land belonging to the land owner is concerned.

HELD

The Hon’ble Court after reading the JDA, observed that there was no outright sale of land being effectuated and the JDA per se cannot be considered merely as a medium adopted by the landowner selling his land and the JDA does not lead to a sale of land by itself. The Court noted that as a result of the petitioner’s investment in the construction activities, the petitioner has a right to realize the money from the sale of developed property, but the eventual transfer of developed / constructed property including undivided share of land in favour of the purchaser of the constructed property will happen only after transfer of the undivided share of land by the landowner by way of sale deed. The Court also observed that the agreement specifically contains a clause to the effect that permissive possession of the developer shall not be construed as delivery of possession in part performance of any agreement to sell under section 53-A of the Transfer of Property Act, 1882 and that JDA contains an obligation that the landowner shall transfer and convey to the developer and / or its nominee(s), the undivided share proportionate to such developer’s share for which completion has been achieved, contemporaneous with the delivery of the landowner’s share by the developer. The Hon’ble Court held that the transfer of ownership from the landowner goes directly to the purchaser of the constructed property and not in favour of the petitioner unless and until the land stands transferred in the name of the Petitioner and hence the same cannot be brought within the ambit of sale.

The Court further held that transferring the development rights does not result in the transfer of ownership rights and the sale of land / transfer of land or undivided share of land would get executed only after the issuance of the completion certificate of the project. Consequently, the services rendered by the petitioner in the execution of JDA prior to the issuance of the completion certificate would thus be amenable to GST.

To conclude, the Hon’ble Court held that the plain reading of the JDA suggests that there are two sets of transactions to be met in its entirety. One is an agreement between the landowner and the petitioner and another is the supply of construction services by the petitioner to the landowners and only thereafter sale of the constructed area to third-party buyers. Both these transactions qualify as ‘supplies ‘and would attract GST subject to clause (b) of paragraph 5 of Schedule II and both these supplies would fall under Section 7 of the GST Act i.e. construction services further read with Entry 5(b) of Schedule II. Under no circumstances can the aforesaid two supplies be termed as the sale of land under Entry 5 of Schedule III. It further held that Notification No.4 of 2018 dated 25th January, 2018 as amended by Notification No.23/2019-Central Tax (Rate), dated 30th September, 2019 does not create a charge on the transfer of development rights but only provides for the time when the tax needs to be paid as the supply of services of transfer of development rights was otherwise always taxable, since the introduction of GST.

91 Veira Electronics (P.) Ltd. vs. State of U.P

[2024] 159 taxmann.com 37 (Allahabad)

Date of Order: 24th January, 2024

The Hon’ble Court refused to entertain a challenge against Notification No. 53/2023-Central Tax dated 2nd November, 2023 on the grounds of discrimination, however, directed the Government to consider including orders passed under section 129 and section 130 in the said notification.

FACTS

The Petitioner challenged Notification No. 53/2023-Central Tax, dated 2nd November, 2023 extending the time limit to file an appeal under section 107 till 31st January, 2024 in certain cases contending that it’s discriminatory for only dealing with the orders passed under sections 73 and 74 and not the orders passed under sections 129 and 130.

HELD

Hon’ble Court refused to issue a writ of mandamus directing the Central Government to include sections 129 and 130 of the Act in the said notification stating that the Government can very well consider adding these two sections in the said notification so that the benefit that has been provided for the orders passed under sections 73 and 74 of the Act can be extended to orders passed under sections 129 and 130 of the Act.

92 Aditri Jewellers vs. Additional Commissioner of CT and GST

[2024] 159 taxmann.com 430 (Orissa)

Date of Order: 30th January 2024

Order passed after 31st March, 2023 allowed the benefit of extended time under Notification No.53/2003-CT dated 21st January, 2023.

The Hon’ble High Court allowed the benefits of Amnesty under Notification No. 53/2023-Central Tax, dated
2nd November, 2023 which extended the time limit to file an appeal under section 107 till 31st January, 2024 in respect of an order passed after 31st March, 2023. The Hon’ble Court relied upon the decision of Hon’ble Patna High Court in the case of Civil Writ Jurisdiction Case No. 17202 of 2023 vide order dated 7th December, 2023.

Note: Readers can also refer to the decision in the case of Nexus Motors (P.) Ltd vs. State of Bihar [2023] 157 taxmann.com 538 (Patna) [30-11-2023].

93 Fairdeal Metals Ltd. vs. Assistant Commissioner of Revenue, State Tax, Bureau of Investigation (NB)

[2024] 159 taxmann.com 158 (Calcutta)

Date of Order: 1st February, 2024

Where the supplier of the assessee was accused of circulating fictitious / bogus Input Tax Credit (ITC) to other parties, however since he had already deposited the said ITC and the assessee was not connected with the allegations levelled against the supplier, the assessee is not held liable for penalty.

FACTS

The petitioner prayed for cancellation of the detention order and subsequent show cause notice and order. The entire proceedings were initiated on the ground that the supplier of the said goods was allegedly involved in receiving and passing on fictitious / bogus ITC to other parties and his company was set up solely for the purpose of circulating bogus ITC. The goods were observed to be of suspicious origin and the purchase was merely a “paper sale” to hide the original supplier with the intention of evading payment of tax. The contention of the department was that the movement of the goods under the cover of such an invalid document is contrary to the provision of section 68(1) of the WBGST Act, 2017, CGST Act, 2017 read with section 20 of the IGST Act, 2017 and Rules framed there under and hence penalty proceedings were initiated. The contention of the petitioner was that he was not supposed to know the antecedents of the Supplier Company.

HELD

The Hon’ble Court noted that though there was an allegation of the non-existence of the supplier company, the input tax credit was already deposited by them before the issuance of the show cause notice to the petitioner. It therefore held that there cannot be said to be an intention to evade the tax. The Court also held that had there been any deficiency on the part of the supplier company to produce relevant documents, registration ought not to have been issued to them. After registration has been issued and tax paid by the supplier company, the allegation made against the supplier company does not stand. The petitioner being in no way connected with any of the allegations that have been levelled against the supplier company, cannot be made liable to pay penalty as has been assessed.

94 Abilities Pistons and Rings Ltd. vs. Additional Commissioner, Circle-2 (Appeal) Commercial Tax

[2024] 159 taxmann.com 326 (Allahabad)

Date of Order: 6th February, 2024

In the case of the import of goods, where the assessee paid IGST @28 per cent but mistakenly missed filling up Part B of the E-Way Bill. Hence mens rea for tax evasion of tax being absent, the order for detention was quashed.

FACTS

In the present case, the goods were imported from China and IGST @ 28 per cent was paid at the time of import. The invoice and the E-Way Bill were accompanying the goods and the description of the goods matched with the invoice. However, Part B of the E-Way Bill was found not filled up at the time of interception. The petitioner filled up particulars in Part B immediately after the interception. In light of the same, the petitioner prayed that intent for evasion of tax was absent.

HELD

The Hon’ble Court allowed the petition and held that there was only technical fault with regard to the non-filling up of Part B of the E-Way Bill, IGST was already paid and no mens rea was present on the part of the petitioner.

Punctuations and Grammar

PUNCTUATIONS AND GRAMMAR

Interpretation of statutes is a work of art and not an exact science. Although we are equipped with a deep legacy of interpretative principles, the derivation of “Intent of legislature” has always been a vexed question. Interpretative skills warrant travelling beyond explicit words to extract the underlying intent. In the process of evolution of a legal word, clause, sentence, sub-section or section, attention is also paid to the punctuation marks in between such sentences to validate the interpretation emerging from the plain wordings. Similarly, the curious question of “AND” being read as “OR” or vice-versa has left many legal luminaries perplexed. The article is an attempt to address both these matters in tandem.

BACKGROUND

The thought about this subject occurred on reading the case of CCE vs. Shapoorji Pallonji1 where the Supreme Court, affirming the decision of the Patna High Court, relied upon punctuation marks to interpret an enactment. The dispute in the case was on the taxability of works contract services rendered to IITs/NITs established under a special enactment of the Government to render educational activities. While there was no dispute on the aspect of Government supervision, the exemption was applicable only if they constituted ‘Governmental Authorities’ under the notification. The definition was first introduced in the exemption notification of 2012 and then underwent a change in 2014, with punctuation playing a critical role in the amendment. The comparison of the unamended and amended definitions is tabulated below:

EXEMPTION NOTIFICATION – 2012 CLARIFICATION NOTIFICATION – 2014
2(s) “governmental authority”’ means a board, or an authority or any other body established with 90% or more participation by way of equity or control by 2(s) “governmental authority” means an authority or a board or any other body;

(i) Set up by an Act of Parliament or a State Legislature; or
Government and set up by an Act of the Parliament or a State Legislature to carry out any function entrusted to a municipality under article 243W of the Constitution; (ii) established by Government,

with 90% or more participation by way of equity or control, to carry out any function entrusted to a municipality under article 243W of the Constitution;

 
1. [2023] 155 taxmann.com 303 (SC) affirming [2016] 67 taxmann.com 218 (Patna)

Naturally, a question emerged whether the phrase “with 90% or more participation…….under article 243W of the Constitution” was applicable to both clauses (i) and (ii) or limited to only clause (ii) of section 2(s). In other words, whether IITs / NITs, which were admittedly set up by an Act of Parliament, were also required to comply with the condition of conducting municipal functions and governed with 90% equity / control. The revenue made out the case that (a) punctuations ought not to be adopted strictly for interpretation of the statute; (b) the phrase “or” should be read as “and” and consequently, the latter part of the definition would apply to both the sub-clauses.

In response, the Patna High Court stated that the phrase “or” is a disjunctive phrase and cannot be read as “and”; hence clause (i) is complete and independent from the latter part of the definition. The Supreme Court affirmed the High Court’s view as follows:

  • The original definition was restricted to only such governmental authorities which satisfied all the three prerequisites of being established under a statute, under 90% control and performing municipal functions of 243W. Because of the unworkability of such a definition, an amendment was introduced to expand its scope. The Court then held that the amendment should not be rendered unproductive by interpreting the amended definition in the same sense;
  • The word “and” or the word “or” are conjunctions with the former being normally conjunctive and the latter being normally disjunctive — unless the terms lead to uncertainty, vagueness or absurdity which warrant alternative interpretation, the law should be read in its ordinary and natural sense without any interchange of words — therefore, clauses (i) and (ii) which are divided by the disjunctive word “or” are independent;
  • Use of semicolon after clause (i) makes the said clause independent and distinct from clause (ii). Clause (ii) on the other hand does not close with a semicolon but with a comma suggesting a continuation of the said clause but this is not so with clause (i). The use of such punctuation was deliberate to overcome the unworkability of the previous definition. Therefore, any interpretation leading to subsistence of the unworkability should be avoided.

One may observe that though punctuations played an important role, the Court has not solely relied upon the use of punctuations. The Court took cognizance of the unworkability of the erstwhile definition and the primary purpose of the amendment. It turned its eye towards the punctuation as a confirmatory note over the intention derived from the amendment. By itself, punctuations could not have been the deciding criteria over the scope of the definition.

It would be interesting to note that the said decision would be binding while analyzing the definition of “governmental authority” as well as “government entity” in the exemption notification for services2 under the GST law. The examination of the said issue can be categorised into three baskets (a) where in many AARs, the semicolon in the said definition was either completely ignored or it was assumed by contending parties that 90 per cent equity / control condition and municipal functions was applicable to both clauses, i.e., governmental authority / entity established under a special Act was required to be subjected to 90 per cent equity / control and performing municipal functions for it fall under the said definition3. The probable reason could be that even if the condition over municipal functions was to be considered as irrelevant as part of the definition of governmental authority / entity, the exemption entry by itself (Entry 3/3A) specified the requirement of the function being part of the constitutional function of Article 243G/W, making such an argument toothless. Moreover, most of the entities performing such municipal functions were under 100 per cent equity / control of the Government and the said condition was inherently satisfied without any ambiguity. (b) In another basket of AARs, where the specific issue was raised, the Patna High Court’s decision was followed and accepted4 by holding that clause (i) of the definition was independent; (c) In the third basket of decisions, it was adversely held that the said matter was under challenge before the Supreme Court and hence, the plain reading ought to be adopted5 — implying that the condition was applicable to both clauses. With this verdict of the Supreme Court, these AARs would need re-consideration and the correct interpretation would have to be applied. The interesting challenge would now arise on the question of binding applicability of such AARs which were rendered on an incorrect premise, especially if the parties to the AAR have not appealed against such decisions. This seemingly settled question would again form fertile ground for litigation under the GST law.

2. Notification 12/2017-CT(R) dated 28th June, 2017
3. RAJASTHAN HOUSING BOARD 2023 (70) G.S.T.L. 95 (A.A.R. - GST - Raj.)
4. NHPC Ltd 2018 (19) G.S.T.L. 349 (A.A.R. - GST)
5. NATIONAL INSTITUTE OF DESIGN 2021 (53) G.S.T.L. 92 (A.A.R. - GST - Guj.); NIRMA UNIVERSITY 2022 (59) G.S.T.L. 437 (A.A.R. - GST - Guj.); National Dairy Development Board [2019] 103 taxmann.com 404 (AAR - GUJARAT)

PURPOSE OF PUNCTUATIONS IN TEXTS

We now turn to the role played by punctuation in English grammar. Punctuation, according to the Oxford Learner’s Dictionary, is defined as “the marks used in writing that divide sentences and phrases”. The Merriam-Webster Dictionary defines punctuation as “the act or practice of inserting standardized marks or signs in written matter to clarify the meaning and separate structural units.” According to the Cambridge Dictionary, the term “punctuation” is defined as “(the use of) special symbols that you add to writing to separate phrases and sentences to show that something is a question, etc.”, and “punctuation is the use of symbols such as full stops or periods, commas, or question marks to divide written words into sentences and clauses”, according to the Collins Dictionary. The role of some punctuations is:

Punctuations Role played
Full stop [.] End of a sentence
Comma [,] Insert a pause into a sentence
Colon [:] Signifies a series or an explanation
Semicolon [;] Indicates two independent clauses
Hyphen [-] Connecting compound words
Parenthesis [( )] Supply further details in a sentence
Apostrophe [‘] Denote some letters omitted
Quotation Marks [“] Denote text speech or words
Ellipsis […] Omission of words or letters, used in quoting texts

It may be noted that the above explanations are not accurate in all circumstances and one may have considered the underlying texture of the sentences rather than directly adopting the above meaning.

IMPORTANCE IN INTERPRETATION OF STATUTES

The golden rule of interpretation (especially in taxing statutes) has always been to interpret the text in simple and literal form without any addition, modification, alteration, etc. Intention of legislation and aids of interpretation should be resorted only in cases of vagueness, absurdity and unworkability. According to GP Singh’s – Principles of Interpretation, in modern statutes, punctuation is a minor element in the construction of a statute and emphasis on punctuation in a carefully punctuated statute should be examined only in cases of doubt.

In a tax case of Shree Durga Distributors vs. State of Karnataka6 the Court was examining whether Dog Feed and Cat Feed were included in the phrase “animal feed” forming part of an entry which read as follows:

“5. Animal feed and feed supplements, namely, processed commodity sold as poultry feed, cattle feed, pig feed, fish feed, fish meal, prawn feed, shrimp feed and feed supplements and mineral mixture concentrates, intended for use as feed supplements including de-oiled cake and wheat bran.”

6. 2007 (212) E.L.T. 12 (S.C.)

The appellant contended that the comma after supplements which specifies a series of products is with reference to “feed supplements” only. The primary term “animal feed” is to be understood in its general sense and ought not to be limited to the list of items following the phrase “feed supplements”. It was contended that there are three parts to this entry (a) animal feed, (b) feed supplements with a list succeeding it, and (c) mineral mixture concentrates. The court refuted the basic premise of the argument by stating that there are only two categories (a) animal feed and feed supplements; (b) mineral mixture concentrates. The first category includes a comma and the word “namely” is applicable to the entire category. The list is exhaustive and since dog / cat feed does not fall into the list, they are not part of the said entry. Moreover, the said entry has two “ands”, with the former completing to the first category and the latter joining the first and second categories.

In another case of the State of Gujarat vs. Reliance Industries7, the Supreme Court examined the significance of commas and full stops in the following section:

“Notwithstanding anything contained in this section, the amount of tax credit in respect of a dealer shall be reduced by the amount of tax calculated at the rate of four percent on the taxable turnover of purchases within the State –

(i) Of taxable goods consigned or dispatched for batch transfer or to his agent outside the State, or

(ii) Of taxable goods which are used as raw materials in the manufacture, or in the packing of goods which are dispatched outside the State in the course of branch transfer or consignment or to his agent outside the State.

(iii) Of fuels used for the manufacture of goods: …”

7. 16 SCC 28 (2017)

In the said facts, a manufacture using fuel was prima-facie covered under both clauses (ii) and (iii), and hence, the revenue claimed that the dealer ought to reverse the input tax credit under both clauses, i.e., twice. The Court analysed all three clauses and observed that the word “or” after clause (ii), makes clause (i) and (ii) as one set and (iii) as a distinct clause. While clauses (i) and (ii) are split by a disjunctive “or” condition, clause (iii) is an independent clause by itself separate from the previous set. Hence, fuels which are used in the manufacture of goods would be subjected to two reversals (4 per cent + 4 per cent), provided the overall reversal does not exceed the input tax credit claim. Here, the court has given due importance to the comma and full stop in clauses (i), (ii) and (iii), respectively. Based on this, it delinked both these clauses from clause (iii) and hence made the same applicable even if the previous clauses were applied.

On the other hand, in the case of Falcon Tyres Ltd vs. State of Karnataka8, the court was examining whether the semicolon after the word “cotton” made the section disjunctive and separate from the main portion. The extract under consideration is below:

“Entry 2 of Second schedule – Agricultural produce including tea, coffee, and cotton.

2(A)(1) ‘agricultural produce or horticultural produce’ shall not include tea, coffee, rubber, cashew, cardamom pepper and cotton; and such produce as has been subjected to any physical, chemical or other process for being made fit for consumption, save mere cleaning, grading, sorting or drying;”

It was contended by the appellant that the semicolon divided the said definition into two parts and the second part was independent and disjunct from the first. Hence, rubber which was though excluded from the first could be included in the second part (being generic in nature) on account of the use of a semicolon. The court rightly rejected the reliance on punctuation on the grounds that the definition was exclusive and “such produce” cannot be meant to include rubber which was otherwise excluded from the definition. In the decisions above, punctuation operated as a guiding factor for courts in interpretation. While words would also take prominence, punctuation only worked as a topping to make the final decision palatable with the intent of the legislature.

8. 6 SCC 530 (2006)

APPLICATION OF ABOVE ANALYSIS

The above brief on punctuation now leads us to live scenarios under GST.

Blocked ITC clause – Section 17(5) is a classic test case to apply the interpretation principles on account of repeated use of punctuation in this long list of blocked credits. As we are aware, the section is an overriding exception to the general rule of allowing input tax credit on all business expenses. The section is exhaustive with semicolons, colons and full stops used in its legislation. Each sub-clause ends with a semicolon except clauses (b), (d) and last clause (i). Whether this observation is of significance may be worth testing.

(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:-

(a) Motor Vehicles for transportation of passengers …………..;

(aa) Vessels and aircraft ……………;

(ab) Services of general insurance …………;

(b) the following supply of goods or services or both-

(i) food and beverages, ………. leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance:

Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;

(ii) membership of a club, health and fitness centre; and

(iii) travel benefits extended to employees on vacation such as leave or home travel concession:

Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.

(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

Explanation.––For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

(e) goods or services or both on which tax has been paid under section 10;

(f) goods or services or both received by a non-resident taxable person except on goods imported by him;

(fa) goods or services or both received by a taxable person, which are used or intended to be used for activities relating to his obligations under corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013);

(g) goods or services or both used for personal consumption;

(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and

(i) any tax paid in accordance with the provisions of sections 74, 129 and 130.

Explanation.–– For the purposes of this Chapter and Chapter VI, the expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes-

(i) land, building or any other civil structures;

(ii) telecommunication towers; and

(iii) pipelines laid outside the factory premises.

Case 1 – Food & beverages clause: At clause (b), one may observe that it is further subdivided into three sub-clauses with a full stop at the end. The first sub-clause of (b) i.e. (i) denies ITC on food and beverages, renting of motor vehicles, etc., and uses the colon punctuation “:” followed by a proviso. The proviso permits, otherwise ineligible, ITC to be claimed if the ITC is used for making an outward supply of the same category of goods or services or as an element of a composite / mixed supply. The question would be whether the proviso which permits ITC is applicable to only clause (b) or even the preceding clauses (a), (aa), (ab). The answer could be simple that the proviso is restricted only to sub-clause (i) of clause (b) and cannot be extended to other clauses. This is purely because each clause ends with a semicolon which signifies that it is independent of the other clauses. The preceding clauses have completed their stipulations by themselves and hence, are not dependent on subsequent clauses for its operation. Moreover, sub-clause (i) of clause (b) ends with a colon and continues into the proviso which subsequently ends with a semicolon, clearly implying that clause (b) is incomplete until the proviso is also considered a part of it. Hence, the benefit of the proviso can be availed only in respect of food, beverages, renting / hiring of motor vehicles if the same are an element of an output supply.

Case 2 – Statutory obligation clause: We can extend this issue to another proviso which succeeds clause (b)(iii). The question of whether the proviso that permits ITC in respect of statutory obligations would extend to all the sub-clauses (i), (ii) and (iii) of clause 17(5)(b) becomes relevant. In other words, whether ITC on canteen facilities which are covered in sub-clause (i) is also eligible if they are provided by factories under a statutory obligation. Applying interpretation principles, an ambiguity over the applicability of the said proviso to clause (b) in its entirety prevails. With the analogy applied in Case 1, the question may seem a difficult issue to address. One may technically state that the benefit of proviso would be restricted only to travel benefits extended by employers to its employees. Fortunately, the CBIC Circular No 172/04/2022-GST9 has stepped in to resolve this conflict and highlighted the true intention of the GST council. It was clarified that the intent of inserting the proviso to 17(5)(b) was to make it applicable to all scenarios of section 17(5)(b) including canteen and rent-a-cab services and not merely restricted to the third clause.

9. dated 6th July, 2022

Case 3 – Immovable Property clause: A very interesting facet arises when we read clauses (c) and (d). Both clauses attempt to restrict input tax credit on construction of immovable property other than plant and / or machinery. While clause (c) permits input tax credit on construction for “plant and machinery”, clause (d) permits such input tax credit when used for “plant or machinery”. The explanation to the said section defines “plant and machinery” and not “plant or machinery”. Naturally, the question arises whether the definition of plant and machinery could be adopted for the phrase plant or machinery.

We may analyse the explanation of the term “plant and machinery” in greater detail to unearth the intent of defining such a phrase. It is apparent, the said phrase has been used in the context of construction activity involving capitalisation to an immovable property. Therefore, the terms “plant and machinery” or “plant or machinery” prima-facie fall under the overall umbrella of “capital goods” as defined under the GST law — i.e., goods which are capitalised in the books of accounts of the assessee. Then why did the legislature choose to define the phrase “plant and machinery” and not “plant or machinery” when both are towards a similar objective? The legislature is always presumed to lay down the law in the most efficient and crisp manner without the use of any futile words unless there is strong necessity / evidence to the contrary. This settled principle provokes the idea that “plant and machinery” is to be treated distinctly from “capital goods”.

The starting point to assess this difference would be to search for such phrases at other instances in the statute and assess such interchangeability. Take, for example, section 18(6) which provides for the reversal of ITC or payment of output tax on supply of “capital goods or plant and machinery”. Noticeably, the legislature has used the phrases “capital goods” and “plant and machinery” in proximity to each other, interjecting a disjunctive word, indicating separate meanings to be assigned to each phrase even though plant and machinery prima-facie appears to be a sub-set of capital goods.

What does this possibly mean? While it is difficult to assign a definitive reason, an answer could be obtained by a comparison of definitions of “capital goods” and “plant and machinery”. Capital goods are defined to mean goods: implying movable property, but “plant and machinery” has been defined to mean equipment, apparatus, etc., which are “fixed to the earth by foundational or structural support”. There would be scenarios where capital goods procured as movables but by way of affixation to the immovable property (such as construction of buildings, etc.) lose their character as movables and become part of an overall immovable property on account of the permanent fixation to earth. The immovable property emerging from the usage of movables would then fall outside the definition of capital goods. Because of losing their character as goods after fixation to earth, it was necessary for the legislature to use a separate phrase alongside capital goods in various instances so that the same treatment could be accorded to such goods akin to movable capital goods. In the absence of any explanation, one could possibly have claimed that the equipment’s on fixation would lose their character of goods and hence, fall outside the definition of “capital goods” even though they are capitalised. This mischief has now been addressed by adding an explanation for the purpose of the entire chapter.

One may recollect the legacy of litigation around the immovability of machinery, equipment, etc., under the Central Excise as well as the Cenvat Rules. Under the Central Excise regime, we have had decisions of assembly / installation of plant and machinery at the site leading to an immovable property on account of the manner and intent of affixation with the land. The apex court’s decision of Sirpur Paper Mills, Triveni Engineering & Indus. Ltd, Solid & Correct Engineering Works, etc., have developed the principles of permanent fixation, cannibalization, for testing the immovability of plant and machinery10. Under the Cenvat Credit Rules, the decisions of Vodafone India Ltd; Indus Towers Limited; Vodafone Essar South Ltd11 have examined whether telecommunication towers which were installed qualified as inputs or capital goods for availment of CENVAT pursuant to installation on an immovable property. On similar lines, decisions in ICL Sugars Limited, SLR Steels, Pipavav Shipyard, etc12 have examined the eligibility of CENVAT of storage tanks, pollution control equipment and overhead cranes based on immovability principles. We also had Tribunal decisions of eligibility of CENVAT in Vandana Global Ltd, Reliance Gas Transportation Infrastructure Ltd13 on foundational support, pipelines, etc., rendered on the principles of immovability. These decisions compelled the legislature to bridge the gap between movables, retaining their characteristics as movable after its usage and movables which lose their characteristics as movables when forming part of immovable property. This gap was bridged by way of this explanation which focuses on such hybrid items which may be movables at the time of receipt / availment but have an end use for business as immovables. Thus, an explanation has been added for the purpose of the entire Chapter of Input tax Credit stating that apparatus, equipment and machinery fixed to the earth either by structural or foundational support would be coined by a specific term “Plant and machinery”. In contradistinction to the phrase “capital goods” which has its emphasis on goods, the emphasis of the term “plant and machinery” has been on the fixation of such goods (a.k.a. capital goods) to the earth and forming part of immovable property. In loose terms, “plant and machinery” is a specified term attributed to those capital goods which are not immovable property, assigning it a distinct identity.

10. 1998 (97) E.L.T. 3 (S.C.); 2000 (120) E.L.T. 273 (S.C.); 2004 (167) E.L.T. 501 (S.C.); 2010 (252) E.L.T. 481 (S.C.)
11. 2015 (40) S.T.R. 422 (Bom.); 2016 (45) S.T.R. J55 (Del.);
12. 2011 (271) E.L.T. 360 (Kar.); 2012 (280) E.L.T. 176 (Kar.); (2023) 4 Centax 246 (Guj.); 
13. 2010 (253) E.L.T. 440 (Tri. - LB) reversed in 2018 (16) G.S.T.L. 462 (Chhattisgarh); 2016 (45) S.T.R. 286 (Tri. - Mumbai)

This theory also fits well while analysing section 29(5) & Rule 40 which uses the phrase “goods held in stock or capital goods or plant and machinery”, again bearing proximity with each other. Explanation to Chapter V of the GST Rules which read as follows:

“Explanation. — For the purposes of this Chapter, –

(1) the expressions ‘capital goods’ shall include ‘plant and machinery’ as defined in the Explanation to section 17”

The explanation specifically includes “plant and machinery” as defined in the explanation to section 17 for the purpose of the availment / reversal of ITC under the GST law. Noticeably, this section has distinguished between “Plant and machinery” and “Plant or machinery”.

Implanting this analysis to section 17(5)(c) and (d) would lead to a better appreciation of the intent of the legislature. One may observe that both phrases are used in parenthesis alongside the construction of an immovable property. We have just understood above that “plant and machinery” refers to those equipment which are affixed as immovable property and “plant or machinery” has no such prescription. On careful consideration, one can note that section 17(5)(c) blocks ITC vis-à-vis the service activity of works contract which results in an immovable property except when such service activity is an input service for outward works contract service. The emphasis is on blockage of the ITC on works contract service resulting in an immovable property. What is delivered by the supplier on rendition of a works contract service is an immovable property. The parenthesis alongside immovable property excludes all “plant and machinery” which fall under the explanation, i.e., fixed to the earth by structural or foundational support and acquire the character of being an immovable property (per settled central excise, cenvat principles). Though they may have been movable at the time of rendition of works contract service and brought to site for installation as immovable property, they form part of immovable property and can avail the benefit of exclusion from
blocked ITC. Typically, turnkey and composite works contract arrangements, where the supply and installation are also performed by the contractor, fall under this clause.

ITC restriction under section 17(5)(d), on the other hand, is not with reference to an act of supply but on the condition of receipt of goods or services which are not forming part of any works contract activity. This is attempted to block ITC where the taxpayer assimilates all goods and services under vivisected arrangements (rather than a composite works contract / turnkey arrangements) with the end use of construction of an immovable property. Since the prescription is with reference to state in which the “goods are received” (in movable form) and then installed on own account by the taxpayer or under separate service contracts, the legislature in its wisdom thought that the general phrase “plant” or “machinery” is more apt rather than specific definition “plant and machinery” under explanation to section 17(5). Implying that the words “plant” or “machinery” needs to be assessed in its generic sense independently at the point of receipt (say factory gate) and the use into an immovable property becomes an event subsequent. While both would be capitalised to the immovable property, the former clause is indicative of turnkey contracts and the latter clause is indicative of vivisected contracts where goods and services are received to the account of the taxpayer and the taxpayer then performs/ assigns the installation separately. Thus, goods or services when procured independently and movable at the time of receipt with subsequent use for construction of immovable property — towards “plant” or “machinery”, may fall outside the scope of section 17(5)(d) even if they are capitalised to immovable property. This convoluted analogy would not hold goods for availment of composite works contract services for “plant and machinery” as buildings, telecommunication towers, pipelines are specifically excluded from the said phrase under plant and machinery.

To summarise, the phrase “plant and machinery” is a specific nomenclature used for hybrid goods which on fixation to earth form an immovable property. They are not necessarily plant and machinery used in its general sense but must be understood strictly based on the explanation. However, “plant” or “machinery” are two distinct words divided by a term “or” which has not been defined in the Act and must be understood independently in its generic sense. Trade parlance use of the word “plant” or even “machinery” would assist in claiming an exclusion from ITC blocked credit under section 17(5)(d). One may tabulate this understanding further:

Term Understanding ITC Testing Condition Installation
Plant and machinery One consolidated phrase bearing a specific nomenclature and well-defined Vis-à-vis receipt of works contract services Part of composite supply of immovable property Equipment, apparatus, etc. fixed to earth
Plant or machinery Generic sense in terms of trade usage with both terms being independent of each other Vis-à-vis at point of receipt of goods / services Goods and services separately received as movables but subsequently used towards immovable property on own account No specific condition as regards manner of fixation

The tabulation indicates that the words “and” and “or” and their interchangeability is not the moot issue here. Rather the moot issue for examination is the entire phrase “plant and machinery” and its applicability to section 17(5)(c)/(d). Had the intent of the legislature been to apply the same meaning, it would have implanted the said phrase in entirety in section 17(5)(d) as well. However, having chosen to adopt a separate phrase on account of past experiences due importance ought to be given to such distinction.

So where does this seemingly zealous interpretation lead to!!! Can the matter of ITC on shopping malls in the case of Safari Retreats14 which is currently pending before the Supreme Court be examined from this perspective? Similarly, whether hotels, cold storages, cinema theatres, etc. which are aggrieved by substantial ITC blockage, claim that the building is a “plant” in a generic sense used for the purpose of business to generate income and hence eligible for ITC credit as part of the exclusion in section 17(5)(d), even-though they are primarily civil constructions and otherwise barred from availment of ITC?

14 2019 (25) G.S.T.L. 341 (Ori.)

In the context of depreciation under income tax we are aware the term “plant” was given a wide import and not just limited to equipment or apparatus which are mechanical or industrial in nature, but also include all goods used by a businessman for the purpose of carrying on his business. We have had cases where anything which facilitates trade or business (apart from stock in trade) or a “tool in trade” was considered as plant irrespective of it being fixed or movable, mechanical or electrical. Income tax law has adopted the “trade parlance” and “functional test” to decide whether an object is a “building” or “plant” or “machinery” i.e., merely a shelter or a tool of running business.

We have the famous case of Taj Mahal Hotels15, where the Court examined whether hotel installations (such as pipelines, electricals, etc.) are plant for the purpose of claim of development rebate (akin to accelerated depreciation). The court affirmed the taxpayers position holding that wide import to the plant would include such installations within its ambit. Subsequently in Anand Theatres16, the court, distinguishing Taj Mahal Hotels, refuted the claim that cinema buildings are plants even though they may be purpose-built. Yet, we have decisions w.r.t. to cold storages in Shree Gopikishan Industries (P.) Ltd. and subsequently in Shri Soneshware Cold Storage17 which distinguished the Anand Theatres decision to hold that from a functionality perspective, a cold storage would be more appropriately classifiable as a plant rather than a mere building. However, in Geetha Hotels P Ltd18, the old principle of Taj Mahal hotels (despite the decision of Anand Theatres) was applied to grant the benefit to the extent of fittings and fixtures which have been installed on the hotel premises. To summarise, we have the case of Navodaya19 where the Tribunal members visited the premises involving a film studio with specialised floorings and equipment and held it to constitute a plant based on the following principles:

  • Functional test is a decisive test.

An item which falls within the category of building cannot be considered to be a plant. Buildings with particular specifications for atmospheric control like moisture or temperature are not plants.

  • In order to find out as to whether a particular item is a plant or not, the meaning which is available in the popular sense, i.e., the people conversant with the subject-matter would attribute to it, has to be taken.
  • The term “plant” would include any article or object, fixed or movable, live or dead, used by a businessman for carrying on his business and it is not necessarily confined to any apparatus which is used for mechanical operations or process or is employed in mechanical or industrial business. The article must have some degree of durability.
  • The building in which the business is carried on cannot be considered to be a plant.
  • The item should be used as a tool of the trade with which the business is carried on. For that purpose, the operations it performs have to be examined.
15. (1971) 82 ITR 44 (SC)
16. 
17. [2003] 131 Taxman 729 (Calcutta) & [2015] 56 taxmann.com 433 (Gujarat)
18. (2000) 243 ITR 192 (SC) 
19. [2016] 67 taxmann.com 180 (SC) affirming [2004] 271 ITR 173/135 Taxman 258 (Ker.)

We, thus, have a see-saw of decisions on this aspect and evidently the functionality of the building would tilt the bar to either side. Yet, one should not lose sight of the contextual setting in which these decisions were rendered under the income tax law vis-à-vis the current subject in hand. There may arise some reluctance to equate these contexts as depreciation was a mandatory requirement under the income tax law but input tax credit is statutory concession of sorts and subjected to legislative discretion. Deriving legislative intent would be a slightly challenging task for taxpayers and courts when it involves external aids of interpretation. Certainly, this would be an emerging area of study and the course taken by the Supreme Court in the Safari retreat’s case would be an interesting wait.

The ultimate takeaway from this analysis would be to recognise the importance of punctuation and grammar very contextually. Alternative interpretational permutations involving punctuation would have to be tested to arrive at the “better interpretation” for the situation. Each alternative would have to be viewed in an unbiased manner and the holistic result should be foreseen prior to concluding the legal position.

Recent Developments in GST

A. AMENDMENT TO CGST ACT

Act No. 48 of 2023 dated 28th December, 2023

By this Act, CGST Act is amended. The amendment is relating to appointment and age limits of the Members of GST Appellate Tribunal. Amongst others, the Advocate is also eligible to appointment as member subject to fulfillment of other conditions.

B. NOTIFICATIONS

i) Notification No. 55/2023-Central Tax dated 20th December, 2023

By above notification, due date for filing of return in FORM GSTR-3B for the month of November 2023 for the persons registered in certain districts of Tamil Nadu is extended till 27th December, 2023.

ii) Notification No. 56/2023-Central Tax dated 28th December, 2023

By above notification, dates for specified compliances are extended in exercise of powers under section 168A of CGST Act. The time limit specified for issuing orders under section 73(10) for the year 2018–19 is extended till 30th April, 2024, and for the year 2019–20 till 31st August, 2024.

iii) Notification No. S.O.1(E), dated 29th December, 2023

By this notification, the principal Bench of Goods and Services Tax Appellate Tribunal (GSTAT) is constituted at New Delhi.

C. NOTIFICATIONS RELATING TO RATE OF TAX

Notification No. 1/2024-Central Tax (Rate) dated 3rd January, 2024 & Notification No. 1/2024-Integrated Tax dated 3rd January, 2024

The above notifications seek to amend NotificationNo. 01/2017- Central Tax (Rate) dated 28th June, 2017 and Notification No. 1/2024-Integrated Tax dated3rd January, 2024. Particularly, the changes are made in Schedule 1, and in Sr. No.165 & 165(A), the tariff items are substituted. The said serial numbers are relating to LPG and other gases.

D. ADVISORY / INSTRUCTIONS

a) Instruction no. 5/2023-GST dated 13th December, 2023 – In this instruction, CBIC referring to judgment of Hon. Supreme Court in the case of Northern Operating Systems Private Limited (NOS), has instructed that the application of section 74(1) of the CGST Act for issuing show cause notices should only occur when investigations reveal concrete evidence of fraud, deliberate misrepresentation, or withholding of facts to avoid tax.

b) The GSTN has issued Advisory dated 29th December, 2023, informing about extension for reporting opening balance of ITC reversal.

c) The GSTN has issued an Advisory dated 1st January, 2024, whereby availability of functionalities on the portal for the GTA taxpayers is informed.

E. ADVANCE RULINGS

49 Liability to GST vis-à-vis Money deposited in Escrow Account

Dedicated Freight Corridor Corporation of India Ltd.

(Order No. A. R. GUJ/GAAR/R/2023/31

dated 3rd November, 2023 (Guj)

The facts are that M/s. Dedicated Freight Corridor Corporation of India Limited (hereinafter, referred as Applicant), a PSU under the ownership and control of Ministry of Railways and incorporated under the Companies Act, 1956, is registered with the GST department.

Applicant is engaged in the business of construction, maintenance and operation of dedicated freight corridors. To undertake this work, they enter into contract with third-party contractors. The agreements so entered into contain dispute resolution clauseto tackle any eventuality of dispute that may arise between the contractor and the applicant.

The dispute resolution clause is based on the General Conditions for Contract as defined in FIDC’s first Edition 1999. [FIDIC means (Federation InternationaleDesIngenieurs – Conseils) which is an International Standards Organization for Consulting Engineering & Construction Technology].

The dispute resolution clause has various features and time mechanisms.

The relevant clause is about deposit of money into Escrow Account, pending litigation. The condition related to deposit in Escrow Account states that if PSUs are challenging any award / order passed against them by the Arbitral Tribunal, they are required to deposit 75 per cent of the amount directed to be paid in such award / order, in an Escrow Account against bank guarantee (BG) submitted by the contractor, without prejudice to the final order of the Court in the matter under challenge. Further that this deposit of 75 per cent amount into Escrow account by the PSU is subject to the fact that the contractor may ask for payment of 75 per cent of the amount awarded in terms of Cabinet Committee of Economic Affairs (CCEA) decision, after justifying the utility of such payment supported with authentic documents.

It was submission of applicant that the amount so deposited by the applicant in an Escrow account cannot be withdrawn by the contractor on his own volition. It was explained that as per the Arbitral Award Escrow Account Agreement, the Banker shall act as the trustee of the Escrow account and in terms of Clause 5 of the said agreement, the concerned banker shall withdraw and appropriate the amounts from the said Escrow account strictly in accordance with the instructions issued by the applicant to the contractor.

The further process of deposit in Escrow Account is that in case the applicant succeeds in the challenge / appeal, the amount so deposited and utilised by the Contractor is required to be paid back along with applicable Interest, and if the contractor fails to do so, the Applicant can en-cash the BG submitted by the contractor.

It is also evident that in case the challenged order / award is passed in favour of the contractor, the Applicant will be liable to pay the remaining 25 per cent of the amount along with any remaining balance in the Escrow account.

The applicant interpreted that even though he has parted away with 75 per cent of the disputed amount required to be paid in terms of the DAB decision / arbitral award, it is not an amount finally ‘paid’ to the contractor but only ‘deposited’ in an Escrow account.

It is submission of applicant that in terms of section 7 of the CGST Act, 2017, with respect to the transaction in question, it cannot be said that there is any supply of goods / services since there is no sale, transfer, barter, exchange or disposal made or agreed to be made for consideration by a person in the course or furtherance of business. It was also submitted that the amount deposited is under its control and appropriation is subject to its consent and subject to furnishing of BG of equivalent amount by contractor.

The treatment of ‘deposit’ as per the definition of term ‘Consideration’ was cited. As per the applicant, the deposit in Escrow Account is deposit as referred to in said definition.

Applicant also pointed out consequences if such deposit in Escrow account is treated as supply.

It was clarified that the present application is in respect of litigated area where no invoice about such litigated area is raised by contractor, like escalation clause, prior period differential amount, etc.

With the above background, the applicant posed the following question for advance ruling:

“1. Whether the amount deposited by the applicant (75%) in escrow account against bank guarantee pending outcome of the further challenge against Arbitral Award or dissatisfaction against DAB decision, is liable to GST under the provisions of CGST Act, 2017?

2. If the answer to first question is in affirmative, then, what shall be the ‘time of supply’ when tax on such DAB/arbitral award is payable to Government exchequer, i.e., whether tax is payable (a) when part amount (75%) is deposited into escrow account pending litigation, or (b) when complete award amount (100%) is paid to the contractor pursuant to finality of the decision.

3. If answer to Question No. 1 is affirmative, whether the applicant is eligible to claim Input Tax Credit (ITC) thereupon?”

The ld. AAR considered argument of department also where they stated that it is supply and liable to GST.

The ld. AAR referred to definition of “consideration” as per section 2(31) and meaning of “supply” in section 7 of CGST Act.

The ld. AAR noted that the primary question raised before them is whether the amount deposited in an Escrow account, which is pending outcome of the further challenge before DAB / Arbitral Tribunal and which can be withdrawn only against BG, is liable to GST under the provisions of CGST Act, 2017 or otherwise. The ld. AAR noted that the main crux of the argument of the applicant is that there is no supply involved in terms of section 7 of the CGST Act, 2017, and that it would not fall within the ambit of the definition of “consideration”.

Based on analysis of facts and definitions as above, the ld. AAR observed as under:

“25. We find that though the amount ie 75% paid into an escrow account is towards the dispute pertaining to the supply, what brings this particular transaction out of the scope of the consideration is the fact is that it is not paid to the contractor [supplier] but is deposited in an escrow account; that it cannot be withdrawn from the account without the explicit approval of the applicant; that the amount can be withdrawn only subject to the condition that the supplier [contractor] provides a BG for the said amount. In-fact, the applicant, though he has deposited the amount in an escrow account, also does not term this as a consideration for the supply since he is agitating his case, feeling aggrieved by the decision rendered against him. In view of the foregoing, we hold it to be outside the scope of ‘consideration’ as defined under section 2(31) of the CGST Act, 2017.”

In view of the above, the ld. AAR held that there isno supply as there is no consideration, confirming no tax is at present payable on said deposit in Escrow account.
However, the ld. AAR put a rider that the moment the supplier [contractor] finally succeeds in the dispute / the applicant accepts the adverse decision, this ruling would be rendered infructuous. In other words, the ld. AAR clarified that this AR is in operation only for a limited period when the supplier [contractor] has not succeeded in the litigation or the applicant has not accepted an adverse decision. The ld. AAR observed that the department reserves every right to recover any interest due on such amount for the delay in payment of GST, if any, on account of the non-acceptance of adverse decision of the DAB / Tribunal.

Accordingly, the ld. AAR disposed of AR application holding that there is no liability on amount deposited in the Escrow account.

50 Job Work

Shree Avani Pharma (Order No. A. R. GUJ/GAAR/R/2023/32

dated 3rd November, 2023 (Guj)

The facts are that the applicant is a partnership firm and is engaged in the job work of converting raw material [inputs owned by others] viz [i] Nitroantraquinone (HSN 2909); (ii) Monon methyl Amine (HSN 2921) & (iii) Bromine (HSN 2801) into Antraquinone derivatives (HSN 2914). The conversion is done by the applicant for their client M/s. Profile Bio-Chemical Pvt Ltd. (referred to as ‘client’), who is registered under GST. It is clarified that during the job work, ownership of the goods does not change, i.e., remains with its client.

Applicant has given the process flow chart, which depicts the following steps:

The applicant has further explained the process in detail, not repeated here for sake of brevity.

Applicant was of opinion that their service of job work falls under SAC 9988, and that he has to pay GST @ 12 per cent.

With this background, the applicant has sought advance ruling on the below mentioned question viz:

“1.Whether the service in question falls within the entry Sr. No. 26 of notification No. 11/2017-CE (Rate) dated 28.6.2017, as amended vide notification No. 20/2017-CT (Rate) dated 30.9.2019 & SAC 9988 (id) & attract GST @ 12% [CGST 6% + SGST 6%] or otherwise.”

The ld. AAR referred to definition of “job work” as given in section 2(68), which reads as under:

“(68) ‘job work’ means any treatment or process undertaken by a person on goods belonging to another registered person and the expression ‘job worker’ shall be construed accordingly.”

The ld. AAR also reproduced Notification No. 11/2017- Central Tax (Rate) dated 28th June, 2017, which gives reduced rate for job work which is amended from time to time.

The last amendment in the above notification is reproduced in AR as under:

“[Notification No. 20/2019-C.T. (Rate), dated 30-9-2019] (n) against serial number 26, in column (3), after item (ia) and the entries relating thereto in columns (3), (4) and (5) the following shall be inserted, namely:

Sl. No. Chapter Section. Heading, Group or Service Code (Tariff) Description of Services Rate (per cent) Condition
(1) (2) (3) (4) (5)
26 Heading 9988 (Manufacturing services on physical inputs (goods) owned by others) ‘(ib) Services by way of job work in relation to diamonds falling under Chapter 71 in the First Schedule to the Customs Tariff Act, 1975 (51 of 1975) 0.75 –
(ic) Services by way of job work in relation to bus body building; 9 –
(id) Services by way of job work other than (i), (ia), (ib) and (ic) above.’ 6 –

2. This notification shall come into force with effect from the 1st day of October, 2019.”

The ld. AAR also made reference to Circular no. 126/45/2019-GST, dated 22nd November, 2019, in which the scope of the above notification is explained.

The relevant portion of circular is as under:

“4. In view of the above, it may be seen that there is a clear demarcation between scope of the entries at item (id) and item (iv) under heading 9988 of Notification No. 11/2017-Central Tax (Rate), dated 28-6-2017. Entry at item (id) covers only job work services as definedin section 2(68) of CGST Act, 2017, that is, servicesby way of treatment or processing undertaken by a person on goods belonging to another registeredperson. On the other hand, the entry at item (iv)specifically excludes the services covered by entry at item (id), and therefore, covers only such services which are carried out on physical inputs(goods) which are owned by persons other than those registered under theCGST Act.”

The ld. AAR considered that the description of the heading 9988 is manufacturing services on physical inputs (goods) owned by others and that the job work as defined under section 2(68) of the CGST Act, 2017, means any treatment or process undertaken by a person on goods belonging to another registered person. The activity of the applicant is converting the inputs supplied by the client into Antraquinone derivatives (HSN 2914).

After discussing the scope of Notification No. 11/2017-CT(Rate) dated 28th June, 2017, the ld. AAR summarised that Sr. No. 26(id) [residual entry] covers job work where inputs are sent by a registered person, while Sr. No. 26(iv) covers manufacturing services (processing) wherein inputs (goods) are sent by an unregistered person.

Since in this case, the applicant is carrying out the processing for their client M/s. Profile Bio-Chemical Pvt Ltd., who is registered under GST and that during the course of job work, ownership of the goods does not change and remains with its client, the ld. AAR concurred with applicant that it is liable to GST @ 12 per cent as per entry at Sr. No. 26(id) of notification No. 11/2017-CE (Rate) dated 28th June, 2017, as amended vide notification No. 20/2017-CT (Rate) dated 30th September, 2019, and the activity is classifiable under SAC 9988, which attracts GST @ 12 per cent.

51 GST charged on Canteen Service provider — Whether ITC available?

Tata Motors Ltd. (A. R. (Appeal) No. GUJ/GAAR/APPEAL/2022/23 (in App.No.AR/SGST&CGST/2021/AR/18)

dated 22nd December, 2022 (Guj))

The appellant has filed an appeal against the Advance Ruling no. GUJ/GAAR/ R/39/2021 dated 30th July, 2021 (2021-VIL-316-AAR).

The appellant had sought Advance Ruling on the following questions, from ld. AAR:

“1. Whether input tax credit (ITC) available to applicant on GST charged by service provider on canteen facility provided to employees working in factory?

2. Whether GST is applicable on nominal amount recovered by Applicant from employees for usage of canteen facility?

3. If ITC is available as per question no.(1) above, whether it will be restricted to the extent of cost borne by the Applicant (employer)?”

In AR, the appellant had submitted that they aremaintaining canteen facility for their employees at their factory premises to comply with the mandatoryrequirement of maintaining the canteen as per the Factories Act, 1948, and as per proviso to section 17(5)(b) of CGST Act, 2017, ITC of GST paid on goods or services or both shall be available where it is obligatory for an employer to provide the same to its employees under any lawfor the time being in force. It was also submitted thatthe appellant is recovering nominal amount from employees and expenditure incurred towards canteen facility borne by appellant is part and parcel cost to company.

The appellant had further submitted that they are not in the business of providing canteen service and, hence, recovery of nominal amount will not fall in definition of supply and relied upon ruling of Maharashtra AAR in the case of Jotun India P Ltd [2019 TIOL 312 AAR GST – 2019-VIL-296-AAR].

The ld. AAR vide the AR order dated 30th July, 2021 referred to the above, gave the following ruling:

“1. Whether input tax credit (ITC) available to applicant on GST charged by service provider on canteen facility provided to employees working in factory? Ans: ITC on GST paid on canteen facility is blocked credit under Section 17(5)(b)(i) of CGST Act and inadmissible to applicant.

2. Whether GST is applicable on nominal amount recovered by Applicants from employees forusage of canteen facility? Ans: GST, at the hands on the applicant, is not leviable on the amount representingthe employees portion of canteen charges, which is collected by the applicant and paid to the Canteen service provider.”

Aggrieved by the aforesaid advance ruling in respect to question no. 1 and indirectly to question no. 3, the appellant has filed the present appeal.

Appellant pointed out that the advance ruling was given by ld. AAR on footing that the proviso to section 17(5)(b)(iii) is not connected to the sub-clause 17(5)(b)(i). However, the appellant submitted that such interpretation cannot be read into it, and if such interpretation of ld. AAR is accepted, then it will make the proviso to section 17(5)(b)(iii) redundant for aspects which have been incorporated under section 17(5)(b)(i).

Various unexpected results of such interpretation were shown to ld. AAAR.

The appellant also relied upon various judgments for interpretation of legislation.

Lastly, the appellant also submitted that the CBIC vide its Circular no. 172/04/2022-GST dated 6th July, 2022, has clarified this issue also at Sr. No. 3 which is as under:

“Sl. No. Issue Clarification
Whether the proviso at the end of clause (b) of sub-section (5) of section 17 of the CGST Act is applicable to the entire clause (b) or the said proviso is applicable only to sub-clause (iii) of clause (b)? 1. Vide the Central Goods and Service Tax (Amendment Act) 2018, clause (b) of sub-section (5) of section 17 of the CGST Act was substituted with effect from
1st February, 2019. After the said substitution, the proviso after sub-clause (iii) of clause (b) of sub-section (5) of section 17 of the CGST Act provides as under:“Provided that the input tax credit in respect of such goods or services or both shall be available,where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.”2. The said amendment in sub-section (5) of section 17 of the CGST Act was made based on the recommendations of the GST Council in its 28th meeting. The intent of the said amendment in sub-section (5) of section 17, as recommended by the GST Council in its 28th meeting, was made known to the trade and industry through the Press Note on Recommendations made during the 28th meeting of the GST Council, dated 21st July, 2018. It had been clarified that “scope of input tax credit is being widened, and it would now be made available in respect of Goods or services which are obligatory for an employer to provide to its employees, under any law for the time being in force.”3. Accordingly, it is clarified that the proviso after sub-clause (iii) of clause (b) of sub-section (5) of section 17 of the CGST Act is applicable to the whole of clause (b) of sub-section (5) of section 17 of the CGST Act.”

 

Appellant further submitted that in view of the above clarification, the appellant is eligible to take ITC on the GST charged by the service provider on the canteen facility provided to its employees working in their factory. They further clarified that input tax credit to the extent applicable on the amount of canteen charges recovered from their employees will not be taken.

The ld. AAAR referred to provision of section 17(5)(b) and reproduced the same as under:

“Section 17(5): Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely:

(b) the following supply of goods or services or both-

(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance:

Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;

(ii) membership of a club, health and fitness centre; and

(iii) travel benefits extended to employees on vacation such as leave or home travel concession:

Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.”

Though ld. AAR has given reasons for adopting its views, the ld. AAAR, considering the above Circular No.172/04/2022-GST dated 6th July, 2022, wherein at Sl. No. 3, it is clarified that the proviso at the end of clause (b) of section 17(5) of CGST Act is applicable to the entire clause (b), the ld. AAAR held that the issue is to be decided in favour of the appellant.

Thus, it is held that Input Tax Credit will be available to appellant in respect of canteen facility provided to its direct employees but not in respect of other types of employees including contract employees / workers, visitors etc. It is also clarified that the ITC will be eligible to the extent of cost suffered by the appellant, i.e., after reducing recovery from employees out of total cost incurred.

In view of the above finding, the ld. AAAR modified the Advance Ruling No. GUJ/GAAR/R/39/2021 dated 30th July, 2021.

52 Recipient vis-à-vis Agent

West Bengal Agro Industries Corporation Ltd. (Order No. 15/WBAAR/ 2022–23

dated 22nd December, 2022) (WB)

The facts are that the applicant is a Government Undertaking under the administrative control of Water Resources Investigation & Development Department, Government of West Bengal. The commercial operations carried out by the applicant are mainly related with three operating divisions namely, (i) Project Division, (ii) Agronomy Division and (iii) Agri Engineering Division.

It was submitted by the applicant that the Agri Engineering Division undertakes civil works as “Executive Agency or Project Implementing Agency” entrusted by various Administrative Departments of Government of West Bengal in the development of rural infrastructure like road, bridge, building, etc., under various schemes like, RIDF, etc., and the applicant accordingly gets the work done from different suppliers / contractors.

The applicant filed this application for ruling on the following issue:

“(a) Whether the applicant is required to issue tax invoice to State Government Department / Directorate on the contract value as determined by the department where the applicant is working as a ‘Project Implementing Agency’?”

The applicant reiterated that upon selection by various departments of Government of West Bengal as an ‘executing agency’, it undertakes various works following the Standard Operating Procedure. The variousclauses in SOP show that the applicant is doing work as an agent.

The applicant submitted that the work being undertakenby him as an ‘executing agency’ is in line with the notification number 5400-F(Y) dated 25th June, 2012,issued by the Audit Branch of Finance Department, Government of West Bengal. The applicant further referred to Memo No. 8183-F(Y) dated 26th September, 2012, which is issued on the subject matter of “Clarification regarding engagement of ‘Agency’ under Rule 47D of Finance Department’s Notification No. 5400-F(Y) dt.25.06.2012” wherein issues regarding the appointment of Government Agency for execution of work in terms of rule 47D has been clarified.

The applicant submitted that the aforesaid clarification along with the SOP to be followed, clearly indicates that his work is to facilitate execution of the entrusted works of the Government Department by calling tender, awarding the work to L1 bidder, monitoring the execution and finally releasing the payment to agency, on behalf of the concerned Administrative Department. It was further submitted that the applicant has no choice to execute the work on its own and has to get the work done by a contractor, being selected through a transparent tendering process.

In light of the above, the applicant contended that his role is similar to an ‘agent’ where the concerned Administrative Department acts as a ‘principal’.

The applicant submitted that for the purpose of implementing any work assigned to him as an ‘executing agency’, he enters into two separate contracts, one with the Department concerned and other with the contractor respectively.

It was also contended that the property in goods used in the execution of works is directly transferred from contractor to concerned Department through principle of accretion, accession or blending, and the applicant neither holds, nor is in a position to transfer the property in goods used thereon, and hence, the contract between the concerned Department and the applicant should not be treated as ‘works contract’ as defined in clause (119) of section 2 of the GST Act.

The applicant also conveyed that the concerned Government department does not ask for invoice from the applicant. In view of the above, the applicant expressed its view that he is not required to submit tax invoice to concerned department for the works done by him as a project implementing agency, and he is required to issue tax invoice only for Agency Fees along with the summary bill of the works done with the required certificate.

The ld. AAR examined the argument of the applicant. The ld. AAR made reference to definition of “recipient” insection 2(93) of CGST Act, which reads as under:

“(a) where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration;

(b) where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available; and (c) where no consideration is payable for the supply of a service, the person to whom the service is rendered, and any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied.”

The ld. AAR observed that the applicant enters into an agreement with the contractor and so he is liable to pay the consideration to the contractor. The ld. AAR also noted the submission of the applicant that he merely acts as an ‘agent’ of the said administrative department to execute the work. The ld. AAR observed that an agent shall also be treated as recipient of supply of goods or services or both since the aforesaid definition has made it abundantly clear that “any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied”. Reading as above the ld. AAR observed that the applicant undisputedly is the recipient of supply provided by the contractor meaning thereby the contractor doesn’t make any supply to the department concerned.

In view of the above findings, the ld. AAR held that there are two separate supplies: the first one by the contractor to the applicant and the second one by the applicant to the department concerned though there is no value addition in respect of the second supply.

The ld. AAR gave ruling as under:

“The applicant while working as a ‘Project Implementing Agency’ is making supplies to State Government Department/ Directorate and therefore is required to issue tax invoice on the contract value as determined by the department.”

Part A – Goods and Services Tax

I. HIGH COURT

82. Parsvnath Traders vs. Principal Commissioner, CGST

2023 (77) G.S.T.L. 413 (P&H.)

Date of Order: 27th July, 2023

Amount deposited during search operation cannot be treated as voluntary deposit and retained by the department where no proceedings were initiated under section 74(1) of CGST Act.

FACTS

Petitioner was engaged in trading of chemicals. Respondent searched the business premises and informed the petitioner that it was in possession of bogus invoices from the supplier without actual receipt of goods and had illegally availed ITC. Further, petitioner was forced to deposit tax amount on the same day and respondent did not provide the copy of statements recorded. On conclusion of search operations, neither any SCN nor any Order determining tax liability as per GST Law was provided to the petitioner. Accordingly, the petitioner requested the respondent to refund the amount deposited during the search. Thereafter, an order rejecting such refund was issued by respondent contending that deposits made voluntarily vide GST DRC-03 amounted to self-ascertainment as per section 74(5) of CGST Act.

Being aggrieved, petitioner preferred a writ petition before Hon’ble High Court seeking refund of amount forcefully deposited during search.

HELD

Hon’ble High Court, relying on its own decision in cases of William E-Connor Associates & Sourcing (P.) Ltd vs. Union of India & Others [76 GSTL 494 (P&H)], Diwakar Enterprises (P.) Ltd vs. Commissioner of CGST & Others [2023 (74) GSTL 202 (P&H)] and Modern Insecticides Ltd vs. Commissioner, CGST and Others [2023 (78) GSTL 423 (P&H)] held that amount deposited during search cannot be retained by department if no proceedings were initiated under Section 74(1) of CGST Act. Further, it was held that the amount deposited during search under stress does not amount to “self-assessment” or “self-ascertainment” as per section 74(5) of CGST Act. Accordingly, Hon’ble High Court instructed respondent to refund the amount deposited back to petitioner within a period of 6 weeks along with interest @ 6 per cent.

Thus, the petition was allowed in favour of the petitioner.

83. TVL. Raja Stores vs. Assistant Commissioner (ST)

2023 (77) GSTL 367 (Mad.)

Date of Order: 11th August, 2023

Audit as per section 65 of CGST Act cannot be conducted by department subsequent to closure of business operations and order for cancellation of registration was passed.

FACTS

Petitioner was a partnership firm registered under GST Act, 2017. It made an application before the department for closure of business. An order was issued allowing the petitioner to close its business with effect from 31st March, 2023. Subsequently, a notice dated 19th May, 2023 was issued for conducting audit under section 65 of CGST Act. Petitioner being aggrieved, filed a writ petition challenging the notice issued for conducting audit before Hon’ble High Court

HELD

It was held that section 65 of CGST Act specifically states that audit can be conducted for “any registered person” “for such period”, “for such frequency” and in “such manner”. Hence, unregistered persons are exempt from purview of the said section. Respondent failed to conduct audit for all these years from 2017–18 till 2021–22. When the section provides for periodical audit, respondent cannot suddenly wake up as per its own sweet will and conduct an audit. However, assessment proceedings could be initiated under sections 73 and 74 of CGST Act against petitioner.

Hence, the impugned order was quashed.

84 Kesoram Industries Ltd vs. Commissioner of Central Tax

2023 (78) GSTL 291 (Tel.)

Date of Order: 20th September, 2023

Garnishee proceedings initiated under section 79(1)(c) of CGST Act without issuing any prior notice are arbitrary and violate the principles of natural justice.

FACTS

Petitioner was engaged in manufacture and supply of cement. A letter was issued to the petitioner on  19th June, 2023 demanding interest of ₹1,28,97,335 on account of delay in payment of tax for the period from July 2017 to January 2023. Also, petitioner was further instructed to discharge the interest liability within 7 days failing which recovery proceedings would be initiated as per section 79 of CGST Act. In its response, petitioner submitted two letters dated 28th June, 2023 and 25th July, 2023, stating that they had already paid interest of ₹13,07,942 on delayed payment of tax dues. However, disregarding the submissions made by petitioner, garnishee proceedings were initiated under section 79(1)(c) of CGST Act vide notice dated 25th July, 2023 and 28th July, 2023 without issuing any SCN or providing opportunity of being heard.

Aggrieved by the same, a writ petition was filed before Hon’ble High Court.

HELD

It was held that respondent had erred while initiating the impugned garnishee proceedings since neither any SCN under section 73 or 74 of CGST Act was issued nor any opportunity of personal hearing was provided resulting in breach of principles of natural justice. Thus, the impugned proceedings are liable to be set aside with a discretion to respondent for initiating fresh proceedings in accordance with law.

85. Ganesh Steel (India) vs. State of Punjab

2023 (79) GSTL 168 (P&H)

Date of Order: 31st October, 2023

Refund of tax fine and penalty deposited for release of goods confiscated under section 130 of CGST Act pursuant to a favourable ordercannot be denied under the pretext that the department intends to file an appeal especially where no appeal was filed for a period of more than 1 year 4 months.

FACTS

An order dated 5th September, 2019 was passed by respondent demanding tax penalty and fine under section 130 of CGST Act amounting to ₹8,80,992. Petitioner for the sake of getting back the goods paid the amount. Subsequently, an appeal was preferred which was decided in favour of the petitioner. Accordingly, the petitioner applied for a refund of the entire amount of ₹8,80,992. Thereafter, application for refund was rejected and refund was declined via order dated 28th April, 2023 by State Tax Officer on the ground that department was under process of filing an appeal against order passed by Appellate Authority which was not filed even after more than 1 year and 4 months had lapsed. Aggrieved, a writ petition was filed before Hon’ble High Court.

HELD

It was held that the department was merely delaying the refund accrued to petitioner since no appeal was filed against the order passed by Appellate Authority for a period of more than 1 year 4 months. Thus, order dated 28th April, 2023 rejecting refund of petitioner was quashed, and respondent was directed to refund the amount within a period of 2 weeks.

86 Praveen Bhaskaran vs. Union of India

2023 (79) GSTL 210 (Ker.)

Date of Order: 20th September, 2023

ITC cannot be denied merely due to non-reflection of transaction in GSTR 2A without examining evidence submitted and giving the opportunity of being heard.

FACTS

ITC claimed by petitioner was denied by an order on the ground that ITC was not reflected in GSTR 2A since the supplier of petitioner had not mentioned supplies while filing GSTR 1. Also, no proof of payment of GST to the department was provided by the petitioner.

Aggrieved, a writ petition was filed before Hon’ble High Court.

HELD

It was held that ITC cannot be denied merely because it was not appearing in GSTR 2A of petitioner. High Court relied on the decisions of Diya Agencies vs. State Tax Officer [2023 (10) Centax 266 (Ker.), Suncraft Energy Pvt Ltd vs. Assistant Commissioner, State Tax, Ballygunge Charge [2023 (77) GSTL 55 (Cal.)] and State of Karnataka vs. M/s. Ecom Gill Coffee Trading (P.) Ltd [2023 (72) GSTL 134 (S.C.)]wherein it was held that reasonable opportunity should be provided to the taxpayer for submitting evidences and ITC should be allowed if the claims were bonafide and genuine. Impugned order for denial of ITC was thus set aside and matter was remanded back to respondent for examining evidences.

Credit Notes in a GST Scenario

INTRODUCTION

In any commercial transaction, an invoice represents a document staking a claim towards supplies made by an entity to another. Subsequent adjustments to the value of such supplies already accounted for through the issuance of an invoice are typically made by either debit notes or credit notes. In many cases, a debit note by one entity is also mirrored by a credit note by another entity and vice versa. It is also a common business practice to issue a debit note instead of a tax invoice in certain specific types of transactions like reimbursements, etc.

Since GST imposes a tax on supplies of goods or services or both, extensive provisions have been made to prescribe for the issuance of a tax invoice, contents of the said invoice and timelines for the issuance thereof. Thus, the issuance of a tax invoice for a taxable supply triggers a liability to pay GST. In fact, by mandating the requirement to issue a tax invoice in all cases of taxable supplies, the GST Law has reduced the extent and flexibility available to commercial enterprises to issue debit notes, and therefore, tax invoice and debit notes cannot be issued interchangeably.

The GST Law also considers situations wherein the supplier is required to issue a debit note or credit note. As mandated by Section 34(3) of the CGST Act, any upward adjustment to the value or tax specified in the original tax invoice would be through a debit note, and the said debit note is required to be reported as specified under Section 34(4). There is no timeline for the issuance of the debit note. Similarly, Section 34(1) permits the issuance of a credit note for downward adjustment to the value or tax and also in circumstances like return of goods or deficiency in supply and Section 34(2) prescribes for reporting of the said credit note. However, Section 34(2) prescribes a timeline for the said reporting. In this article, we shall deal with the various issues revolving around credit notes from a GST perspective.

LEGAL POSITION & ANALYSIS THEREOF

Section 34 of the CGST Act, 2017, deals with the provisions relating to issuance of a credit note. The same provides as under:

(1) [Where one or more tax invoices have] been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient [one or more credit notes for supplies made in a financial year] containing such particulars as may be prescribed.

(2) Any registered person who issues a credit note in relation to a supply of goods or services or both shall declare the details of such credit note in the return for the month during which such credit note has been issued but not later than [the thirtieth day of November] following the end of the financial year in which such supply was made, or the date of furnishing of the relevant annual return, whichever is earlier, and the tax liability shall be adjusted in such manner as may be prescribed.

A plain reading of the above provisions indicates that Section 34(1) permits a taxable person who has made a supply of goods or services to issue a credit note only in following cases:

– The taxable value as per invoice or the tax charged thereon is in excess of what should have been disclosed.

– The goods supplied are returned by the recipient.

– The goods or services or both are found to be deficient.

A quick reading of the above provisions would suggest that the credit note issued shall be declared and adjusted against the tax liability within the above timeline, failing which a taxable person may not be entitled to claim reduction in his outward taxable liability. However, a closer reading of the said provisions may suggest otherwise.

At the outset, Section 34(1) is an enabling provision which permits the issuance of a credit note upon satisfaction of the prescribed conditions. It does not impose any time limit for issuance of the credit note. Therefore, so long as the incidents warranting the issuance of a credit note are attracted, there is no provision in the law which prohibits a supplier from issuing a credit note after the time limit prescribed. Section 34(2) merely prescribes a timeline for reporting of the said credit notes. At this juncture, it may be relevant to interpret the timeline mentioned in Section 34(2). As reproduced above, Section 34(2) requires a credit note to be reported in the return for the month during which such credit note has been issued
but not later than the thirtieth day of November following the end of the financial year in which such supply was made.

This provision can be understood with a simple example. If the supply was made in the Financial Year 2022–2023, and the credit note is issued in June 2023, the above provision requires the reporting of the credit note in the return to be filed for the month of June 2023. It also requires that the said return should be filed before30th November, 2023. In case the supplier omits to report the credit note in the return of June 2023, in view of the specific provisions of Section 37 (discussed later), he can declare the said credit note in any subsequent return so long as the said return is filed before 30th November, 2023.

However, real-life situations can be slightly complex. What if in the above case, if the underlying supply itself is cancelled or the goods are entirely returned in December 2023? Commercially and legally, the credit note cannot be issued before December 2023. Assuming it is issued in December 2023, how would one interpret the above provisions prescribing an outer timeline of 30th November, 2023?

It may be important to understand the provisions relating to the reporting of credit notes. The process of transaction-level reporting of documents in a statement in GSTR-1 to be filed under Section 37, which would automatically result in a compilation of aggregate-level tax liability to be paid through a return in GSTR-3B to be filed under Section 39, is now a settled proposition. It is also clear that GSTR-3B and not GSTR-1 constitutes a return for the purposes of GST Law.

In general, once a credit note is issued u/s 34(1), a taxable person would be required to report it in his GSTR-1 (i.e., statement prescribed u/s 37) which provides as under:

(1) Every registered person, other than an Input Service Distributor, a non-resident taxable person and a person paying tax under the provisions of section 10 or section 51 or section 52, shall furnish, electronically, [subject to such conditions and restrictions and] in such form and manner as may be prescribed, the details of outward supplies of goods or services or both effected during a tax period on or before the tenth day of the month succeeding the said tax period and such details [shall, subject to such conditions and restrictions, within such time and in such manner as may be prescribed, be communicated to the recipient of the said supplies].

As can be seen from the above, Section 37(1) requires furnishing of details relating to outward supplies. What “details” have to be furnished has been prescribed vide Rules. Rule 59(4) provides that the taxable person shall furnish details relating to invoices and debit and credit notes issued during the month for such invoices which were issued previously. Tables 4, 5 and 6 require the reporting of tax invoices whereas Table 9B requires the reporting of debit notes and credit notes. It is, therefore, evident that the law considers invoice and credit note as distinct details.

Independent of the above provisions pertaining to debit / credit notes issued after the issuance of a tax invoice, the law also envisages errors or omissions in furnishing of details pertaining to the above referred invoices, debit notes and credit notes. Section 37(3) of the Act reads as under:

(3) Any registered person, who has furnished the details under sub-section (1) for any tax period [***], shall, upon discovery of any error or omission therein, rectify such error or omission in such manner as may be prescribed, and shall pay the tax and interest, if any, in case there is a short payment of tax on account of such error or omission, in the return to be furnished for such tax period.

Provided that no rectification of error or omission in respect of the details furnished under sub-section (1) shall be allowed after [the thirtieth day of November] following the end of the financial year to which such details pertain, or furnishing of the relevant annual return, whichever is earlier.

Tables 9A and 9C deal with the reporting of the said amendments, and as can be seen from the above provisions, a timeline is prescribed for the said amendments.

Coming back to the original example of a credit note issued in December 2023 for a supply made in FY 2022–2023. Such a credit note would require reporting under Section 37(1) in Table 9B and may not be governed by the timelines prescribed under Section 37(3). What constitutes “discovery of error or omission” would necessarily mean that a document issued was either not reported or reported with some discrepancy in GSTR-1 which required the amendment of GSTR-1 by the taxable person. For example, against an invoice issued in April 2022, the taxable person issues a credit note in June 2022 but fails to disclose the credit note in his GSTR-1, and this omission is detected only in December 2023. Such failure to disclose would be covered u/s 34(3) as this clearly is an omission. However, if the credit note itself is issued in December, it cannot be said that such credit note is governed by Section 34(3), i.e., amendment of an error or omission.

The details furnished in Section 37(1), subject to Section 37(3) are supposed to flow as “self-assessed” liability to GSTR-3B, the return prescribed u/s 39. It is known that GSTR-3B is a summary return requiring disclosure of details of outward supplies and inward supplies at an aggregate level, i.e., no breakup is required to be given as to liability on account of outward supplies, reduction in liability on account of credit notes issued, etc. Therefore, if once a credit note is correctly disclosed u/s 37 (1), the details of which flow to GSTR-3B, there cannot be a question for restriction on adjustment against tax liability as there is no specific restriction prescribed vis-à-vis Section 34(2) for adjustment.

The question that, therefore, arises is what is the role of Section 34(2)? One may say that Section 34(2) firstly casts an obligation by defining a timeline for reporting the credit note and creates a right for the taxable person by permitting an adjustment in the prescribed manner. Prescribed manner would mean reporting a credit note u/s 37 and adjusting the same while filing the return u/s 39, both of which do not restrict adjustment of tax liability on account of such credit notes, as discussed above. Section 34(2) casts an obligation for reporting but does not restrict reporting thereafter. For example, if GSTR-1 is not filed on 11th, it does not mean it can’t be filed on 12th. There are consequences like a late fee, but it could still be filed. However, there is nothing which explicitly mentions that if you do not follow the obligation of reporting, the right of adjustment will be taken away. If the intention was indeed to restrict the adjustment in case of delayed reporting, Section 34(2) should have been worded as under:

The tax liability on account of the credit note referredto in sub-section (1) shall be adjusted in such manner as may be prescribed, only if the registered person who issues the credit note has declared the details ofsuch credit note in the return for the month during which such credit note has been issued but not later than the thirtieth day of November following the end of the financial year in which such supply was made, or the date of furnishing of the relevant annual return, whichever is earlier.

DISTINGUISHING BETWEEN CREDIT NOTE GOVERNED AND NOT GOVERNED BY SECTION 34(1)

As discussed above, Section 34(1) envisages issuance of the credit note, disclosure and adjustment against other tax liability in following scenarios:

– The taxable value as per invoice or the tax charged thereon is in excess of what should have been disclosed.

– The goods supplied are returned by the recipient.

– The goods or services or both are found to be deficient.

In addition to the above, there can be other scenarios necessitating a taxable person to issue a credit note but which may not satisfy conditions prescribed u/s 34 (1), such as:

– An invoice for supply of goods has been issued to customer A, Maharashtra. However, before the goods could be delivered, the customer asked the supplier to issue an invoice to his Gujarat registration.

– An invoice for supply of goods has been issued to customer A though the goods have been delivered to customer B. The invoice issued to customer A is, therefore, required to be cancelled by issuing a credit note, and a new invoice is to be issued to customer B.

– An invoice for supply has been raised for ₹100 plus GST of ₹18. Later on, it comes to the supplier’s attention that the agreed amount was ₹80 / ₹120, and the recipient asks for a new invoice.

– An airline issues a ticket (which is treated as a tax invoice) for a future air travel. However, before the travel, the passenger cancels the ticket resulting in no supply taking place.

In all the above scenarios, the question that arises is whether the supplier has an option to issue a credit note for the invoice issued with incorrect details and generate a fresh invoice or invoice issued for a future supply which ultimately did not take place.

This is relevant because Section 34 permits the credit notes only in specific scenarios. However, the question remains as to whether a credit note can be issued in cases where an invoice issued for supply agreed to be made is subsequently cancelled or invoice is wrongly issued? Can such cases be classified as goods return or deficient supply? This is because to claim goods return, the goods should be supplied in the first place.

Similarly, to claim deficiency in supply, the supply should have been made and only then can there be a deficiency thereof. In this regard, one may refer to similar provisions u/r 6(3) of Service Tax Rules, 1994, which specifically permitted issuance of credit note in specific cases. The said rules provided as under:

(3) Where an assessee has issued an invoice, or received any payment, against a service to be provided which is not so provided by him either wholly or partially for any reason [orwhere the amount of invoice is renegotiated due to deficient provision of service, or any terms contained in a contract], the assessee may take the credit of such excess service tax paid by him, if the assessee,—

[(a) has refunded the payment or part thereof, so received for the service provided to the person from whom it was received; or]

[(b) has issued a credit note for the value of the service not so provided to the person to whom such an invoice had been issued.]

Similar provision permitting issuance of a credit note in case of non-supply per se is missing under GST. Therefore, there is a possibility of the Department claiming that the option of issuing a credit note to rectify the mistakes in an invoice other than in case of scenarios covered u/s 34 is not available.

This leads us to the next question of how to deal with such instances. In such cases, a taxable person always has an option to claim non-liability to pay tax on the grounds that there is no supply being made. GST is levied on supply of goods or services or both. When no underlying supply takes place, there is nothing in the law which authorises the collection and payment of a tax on a supply which is not affected. Therefore, the tax cannot be retained by the Government and should be refunded to the person who bears the same.

In fact, in the context of real estate transactions where cancellation of contracts take place, the Board has issued Circular 188/20/2022-GST permitting the recipient to claim refund of tax paid on cases involving deficient supplies or cancellation of supplies. Interestingly, the Circular at para 4.4 clarifies that in case the time limit prescribed u/s 34 has not lapsed, the supplier can issue a credit note to the recipient and adjust the tax amount against his other liability. In that sense, the clarification can be used to counter any challenge to the issuance of a credit note u/s 34 on account of cancellation of supply. However, so far as wrong invoicing is concerned, whether a credit note u/s 34 can be issued or not remains a subject matter of debate. For such cases also, a taxable person can take shelter under this Circular to claim refund u/s 54(1) of a tax paid, which was otherwise not payable subject to unjust enrichment. Interestingly, section 54(8)(c) provides for a refund of tax paid on a supply which is not provided, either wholly or partly and for which, invoice has not been issued. However, shelter can be taken u/s 54(8)(e) which provides for refund of tax and interest or any other amount paid by the applicant the incidence of such tax and interest has not been passed on to any other person.

CREDIT NOTES IN CASE OF WRITE-OFFS

GST is generally payable at the time of issuance of invoice. However, it is possible that the realisation of invoice might take place over time, and in many cases, there might not be realisation of invoice proceeds, i.e., the amount recoverable from the recipient is written off, either as bad-debts or renegotiation on account of non-payment of consideration by the recipient.

A perusal of Section 34 shows that such write-offs do not qualify as one of the reasons for which credit note u/s 34 can be issued. Therefore, the taxable person cannot claim a reduction from his outward liability, though he can issue a financial credit note, also known as non-GST Credit Note for the purpose of settling the accounts with the recipient.

However, in case of cross-border transactions, i.e., exports, one of the conditions for a supply to be classified as export of service is that export proceeds should be realised in convertible foreign exchange. In fact, when a supplier executes a LUT with the Department for effecting zero-rated supplies without payment of integrated tax, they give an undertaking to make the payment if the export proceeds are not realised within the prescribed period. In such cases, the question that arises is whether reduction in consideration receivable by way of issuance of a credit note (whether or not governed by Section 34) will reduce the obligation on the part of the supplier to demonstrate receipt of consideration to that extent or it will be treated as non-compliance of condition u/s 2(6) of IGST Act, 2017, resulting in a denial of claim of export of services to that extent. The larger issue will be in the context of credit notes not governed by Section 34. In such cases, the only recourse available with the supplier would be to challenge the vires of Rule 96A which requires payment of integrated tax to the extent payment is not realised on the grounds that there is no power to demand tax on export transactions under the Constitution. Additionally, one may argue that write-offs are governed by the FEMA regulations.

In fact, RBI has issued RBI FED Master Direction No. 16/2015-16 dated 1st January, 2016, on “Export of Goods and Services”, consolidating directions in respect of export of goods and services. Para C.23, thereof, provides that, subject to certain conditions, any exporter who has not been able to realise the outstanding export dues despite best efforts may either self-write off or approach the authorised Dealer for write-off of such export bills. The maximum amount of unrealised export proceeds that can be written-off is 10 per cent of total export proceeds realised during the previous calendar year, which itself provides for write-off up to 10 per cent. Therefore, when the law meant to regulate foreign exchange dealings itself allowed for extension of time for realising export proceeds and also provided for writing-off of certain export proceeds and Section 2(6) of the IGST Act alsonot prescribing any time limit to realise export proceeds, Rule 96A and Notification 37/2017-CT dated 4th October, 2017, prescribing the said time limit are ultra-vires the statute.

IMPACT OF CREDIT NOTES ON ITC

One of the conditions u/s 16 to claim input tax credit is that the recipient of supply should have made payment of the consideration to the supplier except in cases where the tax is payable on reverse charge basis. The relevant provision is reproduced below:

Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be [paid by him along with interest payable under section 50], in such manner as may be prescribed.

As discussed above, a supplier can issue two types of credit note, one which is governed u/s 34(1) and results in reduction of his outward tax liability and another being a financial / commercial credit note which does not have any impact on his outward tax liability. In either case, the credit note results in the supplier agreeing to a reduction in the consideration receivable for the supply. The question that remains is whether in the case of the issuance of a credit note by the supplier casts an obligation on the recipient to reverse the ITC claimed.

It must be kept in mind that issuance of a credit note results in reduction in the consideration payable by the recipient to the supplier, i.e., to the extent of the credit note issued, the supplier foregoes his right to receive the consideration, and therefore, to that extent, it cannot be said that there is a failure to pay by the recipient to the supplier. What constitutes failure to pay has been dealt with by the Bombay High Court in the case of Malaysian Airlines vs. UOI [2010 (262) E.L.T. 192 (Bom.)] wherein it has been held that failure to pay means non-payment when amount is due. In the case of a credit note, when the supplier himself has agreed to receive a lower amount, the question of the amount being due to that extent does not arise, and therefore, it cannot be said that there is a failure to pay to the extent of the credit note issued. This view has also been followed in Board Circulars 877/15/2008-CX dated 17th November, 2008 and 122/3/2010-ST dated 30th April, 2010. In fact, in the context of post supply discounts, even in the context of GST, the CBIC had clarified that no reversal of ITC is required vide Circular 105/24/2019-GST dated 28th June, 2019 (though subsequently withdrawn by circular 112/31/2019 – GST dated 3rd October, 2019) as under:

5. There may be cases where post-sales discount granted by the supplier of goods is not permitted to be excluded from the value of supply in the hands of the said supplier not being in accordance with the provisions contained in sub-section (3) of section 15 of CGST Act. It has already been clarified vide Circular No. 92/11/2019-GST dated 7th March, 2019 that the supplier of goods can issue financial/commercial credit notes in such cases but he will not be eligible to reduce his original tax liability. Doubts have been raised as to whether the dealer will be eligible to take ITC of the original amount of tax paid by the supplier of goods or only to the extent of tax payable on value net of amount for which such financial/commercial credit notes have been received by him. It is clarified that the dealer will not be required to reverse ITC attributable to the tax already paid on such post-sale discount received by him through issuance of financial/commercial credit notes by the supplier of goods in view of the provisions contained in second proviso to sub-rule (1) of rule 37 of the CGST Rules read with second proviso to sub-section (2) of section 16 of the CGST Act as long as the dealer pays the value of the supply as reduced after adjusting the amount of post-sale discount in terms of financial/commercial credit notes received by him from the supplier of goods plus the amount of original tax charged by the supplier.

Therefore, in general, one may take a position that no obligation is cast on the recipient to reverse the ITC on account of a credit note issued by a supplier. However, when a credit note is issued u/s 34(1), it inter alia means a reduction in the value of taxable supply and the corresponding tax payable on the said supply. In fact, Section 15(3), which deals with exclusion of discount from the value of supply, specifically provides that exclusion of eligible discount from the value of supply shall be permitted only if the recipient also reverses the corresponding ITC. However, the same applies only in the context of eligible discounts which are excludable from the value of taxable supply. However, there is no such condition prescribed u/s 34 which requires the supplier issuing credit note to ensure that the recipient reverses the corresponding ITC except when issued in relation to a discount eligible for exclusion from value of supply. However, in case the supplier has issued a credit note u/s 34, a logical conclusion would be that the same results in a reduction in the value of supply for both the parties, and therefore, even the recipient will have to reverse the claim of ITC. The same has also been clarified under the pre-GST Regime by Board Circular 877/15/2008-CX dated 17th November, 2008 as under:

3. In view of above, it is clarified that in such cases, the entire amount of duty paid by the manufacturer, as shown in the invoice would be available as credit irrespective of the fact that subsequent to clearance of the goods, the price is reduced by way of discout or otherwise. However, if the duty paid is also reduced, along with the reduction in price, the reduced excise duty would only be available as credit. It may however be confirmed that the supplier, who has paid duty, has not filed/claimed the refund on account of reduction in price.

To summarise, in case of credit notes issued which are governed by Section 34, there is a requirement on the part of the recipient for the supplier to claim reduction in his outward tax liability. This takes us to the next question of when shall the reversal of ITC trigger. Just like there can be a timing difference in the issuance of invoice by the supplier and corresponding claim of ITC by the recipient, there can always be a timing difference in case of issuance of a credit note by the supplier and its accounting by the recipient. In fact, on many occasions, it is observed that the issuance of a credit note comes to the notice of the recipient on the basis of transaction reflecting in GSTR-2A which might also involve a scenario wherein the supplier declares the credit note backdated; for example, credit note dated April 2022 is disclosed in GSTR-1 of September 2022 and the recipient accounts for the same only in December 2022.

The question in such case would be whether the recipient is required to reverse ITC in April 2022 (credit note period), September 2022 (GSTR-2A period) or December 2022 (accounting period) and can the Department demand interest for delay in reversal of ITC in case the ITC is reversed in period subsequent to April 2022, i.e., May 2022 and onwards.

To deal with such a scenario, one would need to determine when the liability to reverse ITC triggers. While there is no specific provision for this, there is a provision as to when the ITC can be claimed, which is governed u/s 16. Section 16(2)(a) specifically provides that for claiming ITC, the recipient should be in possession of the document. More importantly, the recipient was not even aware of the issuance of the credit note in April 2022. Expecting him to reverse the ITC on the basis of a document which he is unaware of is clearly incorrect. Similarly, expecting reversal of ITC in September 2022 would also be incorrect. It must be noted that a recipient cannot claim ITC merely on the basis of transaction reflecting in their GSTR-2A. Similarly, a recipient cannot be expected to reverse the ITC merely on the basis of a credit note reflecting in GSTR-2A. Logically, if there is an expectation to reverse the ITC, the same can also be done only when the recipient is in possession of the corresponding document, i.e., credit note. Therefore, one can take a view that the tax period in which the credit note is received by the recipient is the appropriate trigger for reversing the ITC.

Another aspect which needs to be looked into is whether a recipient can defer the reversal of ITC on the ground that the same is not reflecting in his GSTR-2B, and therefore, just like claim of credit is dependent on ITC reflecting in GSTR-2B, even the reversal of ITC should depend on the same. Meaning there can be a situation where the recipient receives the credit note in September 2022 but the same is reflected in GSTR-2B of December 2022. A strict reading of the provision would indicate that just like eligibility to claim ITC is dependent upon the transaction reflecting in GSTR-2B, even the reversal, thereof, should depend upon the transaction getting reflected in GSTR-2B. This is because unless and until the transaction is not reflected in GSTR-2B, the recipient may not be in a position to determine whether the credit note received by him is governed by Section 34(1) or not and whether the recipient has adjusted his outward liability to that extent or not. If the recipient reverses the ITC and the supplier has issued a commercial / financial credit note not governed by Section 34(1), the transaction might end up getting taxed twice, as the recipient would have reversed the ITC and the supplier would not have claimed reduction in outward tax liability.

Another angle to be analysed is from the perspective of ITC claimed on import of goods. At times, after the goods are imported and cleared on payment of IGST, there are credit notes issued by the supplier. Whether a reversal of ITC would be triggered on such credit notes, as there is no exclusion prescribed under the 2nd proviso of Section 16(2) for ITC claimed on import of goods. A view can be taken that since the original document, based on which the ITC was claimed, i.e., bill of entry filed on the strength of commercial invoice issued by the supplier was not a tax invoice, even the consequential credit note cannot be issued u/s 34. Since such a credit note cannot have any GST implications, the question of any consequential impact on ITC should not arise. More importantly, there is also the support to claim that the issuance of a credit note does not result in failure to pay, and therefore, the 2nd proviso of Section 16(2) will also not get triggered in such cases.

CONCLUSION

Issuance of credit notes in commercial parlance is common. However, when such a credit note is issued in relation to a taxable outward supply, it gives rise to tax implications for both, the supplier issuing the invoice from the perspective of claiming reduction in outward tax liability as well as the corresponding recipient from the perspective of liability to reverse the input tax credit, if any. It is, therefore, important that while dealing with input tax credit, both at the time of issuing as well as receiving them, one exercise due care and understand the GST implications thereon.

Part B – Service Tax

I. TRIBUNAL

25 Ours Aariya Bhavan vs. CGST & CE

2023-TIOL-1-36-CESTAT-MAD

Date of Order: 13th October, 2023

Whether service charge for the supply of bed rolls for the use of passengers travelling in A/C and First Class during train journeys would amount to business auxiliary service. Held, No.

FACTS

Appellant vide an agreement with Indian Railways Catering and Touring Corporation (IRCTC) supplied bed rolls for the use by passengers and collected a service charge from IRCTC and paid no service tax. A show-cause notice was issued proposing to levy service tax considering the activity and service charge towards business auxiliary service along with interest and imposed penalties. It was upheld by the adjudicating authority and also in the first appeal. It was argued for appellant that the clause (vi) of definition of business auxiliary service contained in section 65(19) of Finance Act, 1994 (the Act) relates to rendering of a service on behalf of a client whereas the service in the instant case of providing bed rolls is rendered to IRCTC and charge also is collected from them and no amount is collected from passengers. According to the department, the demand was legal and proper as the appellant had to clean bed rolls periodically and supply the same for passengers. Hence, it was covered by the definition of business auxiliary service in the clause invoked.

HELD

On examining the definition contained in section 65(19) of the Act, there was no merit found in sustainability of demand apart from non-justification of invoking of extended period.
Appeal was thus allowed on merits.

26 HSBC Electronic Data Processing India Pvt. Ltd. vs. CCT
2023-TIOL-1102-CESTAT-HYD
Date of Order: 20th November, 2023

Input services of advertising, air travel agents, courier services, erection, commissioning insurance, insurance auxiliary service, management consultancy etc., whether can be disallowed ad hoc?

FACTS

Appellant provided Information Technology (IT) or IT enabled service and claimed CENVAT credit on input services utilized for providing these output services. However, credit was disallowed under Rule 14 of CCR though a similar issue involved in refund proceeding under Rule 5 of CCR read with Notification No. 26/2012 and nexus theory was examined in detail allowing CENVAT credit. Hence, pursuant to the order of Commissioner (Appeals) which recorded that disallowances were arbitrarily done during adjudication and as a result of inadequate effort to determine justifiability, the eligibility or otherwise of the credit of tax on input services was in dispute. Considering the nature of activity, its relevance and judicial rulings, the benefit was extended to appellants on input services listed above in the said refund proceeding.

HELD

It was observed that the proceedings under Rule 14 and Rule 5 of CCR are similar in nature. Taking notice, the order of the Commissioner (Appeals), it was found that the issue involved was already adjudicated in detail and has been allowed in favour of appellants.

Hence the order was set aside.

27 Hawkins Cookers Ltd vs. CCGST & CE
2023-TIOL-1136-CESTAT-MUM
Date of Order: 6th November, 2023

CENVAT credit of service tax on outdoor catering service provided for canteen facilities for employees and staff during shifts and office hours, whether an eligible input service.

FACTS

Appellant, a manufacturer registered under Central Excise and also under service tax under reverse charge mechanism had a dispute with the department on eligibility of CENVAT credit of service tax paid on canteen facility provided by outdoor caterer. Per department, outdoor catering service is excluded from the definition of “input service” contained in Rule 2(l) of CCR for the period 1st January, 2016 to 30th June, 2016, and hence credit is disallowable with interest and attracting penalty under section 78. Both adjudicating authority and the appellate authority confirmed the liability with interest and penalties and hence, the present appeal. For appellant, it was conceded that the issue stood covered in the Larger Bench of the Tribunal in the case of Wipro Ltd. vs. CCE Bangalore – III 2018-TIOL-3256-CESTAT-Bang-LB. However, the extended period of limitation along with imposition of interest and penalty are not sustainable in view of the decisions of higher judicial forum in support of the same. Reliance was placed on:

a) ICCE 7 ST Rohtak vs. Merino Panel products Ltd. 2023 9383) ELT 129 (SC)

b) Hindustan Coca Cola Beverages Ltd. vs. CCE & ST Vadodara (2023) 2 CENTAX 116 (Tri. Ahmd), and

c) Sasken Technologies Ltd. vs. CCE Bangalore 2019-TIOL-3374 CESTAT Bang.

It was submitted for appellant that for the earlier period in their own case, Tribunal had allowed the appeal by way of remand for verification and passing of fresh order vide order dated 29th November, 2017. Thus it was claimed that the department was well aware of the issue of taking credit in respect of outdoor catering service. According to the department, however the issue has attained finality when Supreme Court upheld Karnataka High Court’s order denying credit of service tax on outdoor catering services in the case of Toyota Kirloskar Motors Pvt. Ltd. 2021(55) GSTL129 (SC) post 01/04/2011 and interest on irregular availment of CENVAT credit is provided under section 75 read with Rule 14 of CCR and consequently penalty imposed was sustainable.

HELD

Submissions of both the parties were heard, considered and discussed in detail to reach a conclusion that the appellant was registered under both Central Excise and Service Tax, and the department was well aware of the factual matrix of the case and grounds of suppression was unable to be accepted. Reliance in this context was placed on the case of Pushpam Pharmaceutical Company vs. CCE Bombay 1995 (78) ELT 401 (S.C) ruling that when the Revenue is aware of the facts, issuance of show cause notice should be confined to normal period. Also it was observed, similar situation and decision in the case of Anand Nishi Kawa Co. Ltd. vs. CCE Meerut 2005 (188) ELT 149 (SC) and it was observed and held that various Tribunal decisions bring out the fact that there was lack of clarity during the disputed period on the issue of availment of CENVAT credit of service tax on outdoor catering service and hence, was considered an interpretational issue. There were divergent views prevailing until it got settled by the Larger Bench in case of Wipro (supra) and ultimately also at the highest forum in Toyota Kirloskar (supra). Hence, invoking suppression and penalty under Rule 15(2) for demanding inadmissible credit cannot sustain. Hence, interest and penalty imposed were set aside and the matter was remanded back to original authority for re-quantification of demand for the normal period with regard to outdoor catering service and thus allowed appeal partly.

28 Naya Sarai SSS Ltd vs. CST & Others

2023-TIOL-1135-CESTAT-KOL

Date of Order: 23rd November, 2023

When work order clearly provided for execution of jobs as contractors, confirmation of demand as manpower supply was unsustainable.

FACTS

All the three appellant societies involved executed various jobs entrusted to them by Heavy Engineering Corporation Ltd. (HEC) and the impugned common order was passed for all the three appellants. Hence, all are taken together. As per specimen work order issued by HEC, according to appellants, fixed rate on Tonnage basis and the quantity was specified and not the number of workers to be employed. It had to be decided by each of the appellant societies to display the workers as required and number of days as they deemed appropriate. HEC being a PSU, however was responsible to avoid exploitation of labour and hence ensured adherence by appellants of Minimum Wages Act, deductions of ESI, CPF etc. and depositing the same to the respective authorities. The execution of work did not amount to supply of manpower as defined in section 65(68) of the Act read with section 65(105)(L). Reliance was placed inter alia on 2016 (41) STR 806 (Bom) CCCEX & ST Aurangabad vs. Shri Samarth Sevabhavi Trust and 2023 (73) GSTL 363 (Tri. Chennai) S Selvam vs. CCE & ST Tiruchirapally.

HELD

After interpreting the contract between the parties and perusing statutory provisions of manpower recruitment and supply agency and considering relied upon authorities, it was held that the work orders issued by HEC clearly revealed job and the quantity by contractors and not to supply or recruit manpower.

Hence, the orders were set aside.

Part A – Goods and Services Tax

I. HIGH COURT

71 Xilinx India Technology Services Pvt. Ltd vs. Special Commissioner, Zone-VIII
2023 (78) GSTL 24 (Del.)
Date of Order: 1st September, 2023 

Refund of IGST of a Subsidiary EOU incorporated in India providing services to its holding company outside India, cannot be denied by contending that the condition stated under section 2(6)(v) of the IGST Act 2017 are not satisfied.

FACTS

Petitioner, an Export Oriented Unit, had entered into an intercompany service agreement with its holding company located in the USA for export of information technology software services. Petitioner filed an application for refund of IGST amounting to ₹1,83,34,289 which was rejected by the respondent. A SCN was issued contending that condition under section 2(6)(v) of IGST Act which -provides that the petitioner and its holding company are merely establishments of a distinct person. Hence the condition was not satisfied and thus service provided did not constitute as export of services. Reply was filed by petitioner after referring to Circular No. 161/17/2021-GST dated 20th September, 2021 which expressly clarified that supply of services by a subsidiary of a foreign company, incorporated in India by establishment of said foreign company located outside India would not be barred by the condition stipulated under section 2(6)(v) of IGST Act. Petitioner further stated that the services provided were on their own account and were on principal-to-principal basis. Despite the detailed reasoning, the respondent without referring to the circular simply passed an order rejecting the refund.

HELD

The Hon’ble High Court held that services provided by a subsidiary of foreign company to its holding company are not covered under section 2(6)(v) of IGST Act. Impugned order was passed mechanically without application of mind ignoring and disregarding the basic provisions of law and circular. The respondent was directed to process the refund along with interest. Accordingly, petition was allowed in favour of the assessee.

72 Modern Insecticides Ltd. vs.
Commissioner CGST 
2023 (78) GSTL 423 (P & H.)
Date of Order: 19th April, 2023 

Amount deposited during the search operation cannot be treated as voluntary where no proceedings under section 74 of CGST Act, 2017 have been initiated and hence liable to be refunded to petitioner.

FACTS

Petitioner was a manufacturer of pesticides. On  5th March, 2020, respondent conducted a search operation at factory premises of petitioner, during which respondent seized all the documents and prepared a panchnama on the same day. Further, the respondent created an artificial shortage of goods without actual stock count which involved the GST and penalty amounting to ₹34,04,855 and ₹5,10,728, respectively. Petitioner deposited the said amount under pressure. Subsequently, a second search was conducted on 15th January, 2021, wherein director and CA of petitioner were detained. Both were released on a condition of deposit of ₹2.15 cr which was paid by reversing the ITC and surrender of refund application filed. Petitioner requested to refund the total amount of ₹2.54 cr as no proceedings were initiated by issuance of notice and no summons were issued under section 74(1) of the Act from the date of search till the amount deposited. Respondent contended that since petitioner had deposited money voluntarily, no notice was required to be issued. Being aggrieved, petitioner preferred this petition before Hon’ble High Court.

HELD

The Hon’ble High Court, relying upon the decision of Delhi High Court in case of Vallabh Textiles vs. senior intelligence officer and others2023 (70) STL 3 (Del) held that the amount deposited during search operation cannot be considered as voluntary. Department cannot issue Form GST DRC-01A for tax recovery since no proceedings were initiated by the department till date. The deposit of tax amount during search cannot be retained by the department and accordingly, the department was directed to refund the deposited amount along with interest.

73 Shyam Sel and Power Ltd. vs. State of U.P.
2023 (78) G.S.T.L. 283 (All.) 
Date of Order: 5th October, 2023 

Penalty under sections 129(3) and 130 should not be levied where there was a minor breach and no intention to evade tax was observed.

FACTS

Petitioner was engaged in manufacture and sale of industrial grade steel components. Goods sold by the petitioner were in transit from West Bengal to Kanpur were accompanied with all necessary documents such as tax invoice, e-way bill and goods receipts. Subsequently, these goods were intercepted by concerned authorities on the way and on verification it was found that the e-way bill had already been cancelled by the purchaser without informing the petitioner, the reason being disagreement with valuation and quantum of goods. Form MOV 06 was issued and goods were seized. Further, GST MOV 07 was issued seeking response from petitioner wherein no intention to evade tax was observed. Response submitted by petitioner that all e-way bills were filled up and they were unaware that the same were cancelled by purchaser was rejected. Further, order in Form MOV 09 was passed and penalty was imposed under sections 129(3) and 130 of CGST Act. Subsequently, an appeal filed by the petitioner was rejected. Aggrieved, a writ petition was filed before Hon’ble High Court.

HELD

High Court relying upon decision of Apex Court in case of Asstt. Commissioner (ST) vs. Satyam Shivam Papers (P.) Ltd. 2022 (57) GSTL 97 (SC), held that there was no intent to evade tax and goods in question did not reach the destination only due to circumstances beyond the control of petitioner. No such intention was observed for invoking proceedings under section 129(3) and 130 of CGST Act. It was a minor breach and proceedings should have been initiated under section 122 of CGST Act. Impugned order was set aside.

74 M. Sathess Kumar vs. Deputy State Tax Officer-2
2023 (78) GSTL 388 (Mad.) 
Date of Order: 30th August, 2023 

No Assessment Order shall be passed under section 73 of CGST Act, 2017 before considering the reply filed by the petitioner.

FACTS

Petitioner was engaged in providing works contract services to Government departments and local bodies. Subsequent to the increase in the rate of GST from 12 per cent to 18 per cent, notice was issued by respondent stating that petitioner had not paid excess liability. Petitioner submitted a reply on 24th July, 2023 but an order was passed by respondent on 25th July, 2023 without considering the reply submitted on the ground that petitioner failed to appear and submit their reply during 3 personal hearings granted previously. Aggrieved, writ petition was filed before Hon’ble High Court to quash the impugned order.

HELD

It was held that assessment order was passed by violating the principle of natural justice and the respondent is bound to consider the response submitted by the appellant before passing any impugned order. Respondent to grant one or more opportunities for personal hearing before passing a speaking order.

75 Rane Madras Ltd. vs.
Assistant Commercial Tax Officer (Appeals)
2023 (77) GSTL 382 (Mad.)
Date of Order: 2nd August, 2023 

Appeal filed manually due to technical glitches on portal against TRAN-1/2 Order before issuance of Notification No. 29/2023-CT dated 31st July, 2023 cannot be rejected merely on account of delay as specified under Section 107 of CGST Act.

FACTS

Petitioner attempted to file an appeal against the TRAN-1 rejection order dated 28th February, 2023 electronically as per Rule 108 of CGST Rules. Due to technical glitches on the portal, the petitioner was not able to upload the appeal. Another attempt was made to file an appeal online which was unsuccessful. Subsequently petitioner filed a complaint on the portal on 31st May, 2023 to which there was a reply from GST Helpdesk on 13th June, 2023 that TRAN-1/2 orders are not enabled for Appeal on GST Portal and petitioner was asked to wait till further instructions were issued on this matter. Meanwhile, the petitioner filed an appeal manually on 12th June, 2023 which was rejected by respondent by issuing order on the ground that appeal was filed after time specified under section 107 of CGST Act. Aggrieved, writ petition was filed before Hon’ble High Court.

HELD

It was held that appeal should not be rejected on the ground of delay, where due to absence of facility on GST portal, appeal was filed manually. Petitioner had already complied with Notification No. 29/2023-Central Tax dated 31st July, 2023. Any appeal filed before issuance of this notification was considered to be filed on time and hence cannot be rejected on the basis of delay in filing appeal as per section 107 of the CGST Act. Respondent directed to dispose off the order on merits.

76 Vriddhi Infratech India (P.) Ltd vs. Commissioner, Commercial Tax
[2023] 157 taxmann.com 278 (Allahabad) 
Date of Order: 23rd February, 2023 

Whether the authorities have misread Form GSTR-9 by not taking into consideration the entire form, the orders passed confirming the demands are set aside. 

FACTS

Notice under section 61 of the CGST Act was served upon the petitioner, claiming that in the annual return filed in the form GSTR-09, he has shown his turnover as R129.52 lakh which does not tally with his Bank Statement. The demand was confirmed by both the original as well as appellate authorities. The petitioner contended that the very basis of the notice is wrong since in his GSTR-9, the turnover of an amount R129.52 lakh is shown as only with regard to supply made to unregistered persons i.e., under the B2C category. It was thus contended that the authorities did not read the form as a whole.

HELD

The Hon’ble Court held that since the authorities concerned failed to take into consideration the entire form which at its end shows a total turnover of R2037 lakh in GSTR-9 and have committed the said misreading of GSTR-9, both the orders are liable to be set aside.

Note: The SLP filed against the said judgment is dismissed by the Hon’ble Supreme Court Refer (2023) 57 taxmann.com 279 (SC) dated 24th November, 2023. 

77 Sine Automation and Integration (P.) Ltd.
vs. UOI 
[2023] 157 taxmann.com 259 (Bom) Date of Order: 29th November, 2023 

Where the petitioner filed a refund application for the period April 2018 to July 2019 and included therein ITC attributable to F.Y. 2017–18 which was standing to the credit of the petitioner in the form of a running account, the order rejecting the refund on the ground that it was not permissible for the petitioner to club both the periods i.e., period before 1st April, 2018 and subsequent period is set aside. 

FACTS

The petitioner had made an application for a refund of the unutilized ITC under section 54(3) of the CGST Act, 2017 on export of goods under Letter of Undertaking (LOU) for the period April 2018 to July 2019. The said refund application included certain credits claimed even for the financial year 2017–18. The refund was sanctioned after due verification, however, the said order was challenged by the department before the Commissioner (Appeals) and the order directing payback of the refund was passed on the ground that as per Circular dated  18th November, 2019, the refund claim filed could not be spread across different financial years.

HELD

The Hon’ble Court held that as the credit which was available for the period prior to 1st April, 2018 pertained to the financial year 2017–18 the same was certainly available to the petitioner in its electronic ledger in the form of a running account, such refund cannot be denied.

78 Nemi Pharma Chem vs. Additional Commissioner of CGST & CX
[2023] 157 taxmann.com 478 (Bombay) 
Date of Order: 14th December, 2023

Whether the assessee filed a request for adjournment allowing 30 days to make submissions, the Order passed without responding to the said adjournment request and without giving an opportunity of being heard is liable to be set aside.

FACTS

The petitioner was issued a show cause notice on  12th April 2023, however, there was no compliance of the said show cause notice by the petitioner. On  26th June, 2023, the petitioner filed a letter requesting the respondents to provide a copy of the said show cause notice, since the address at which it was issued was no more occupied by the petitioner and also requested for an adjournment of 30 days, so as to enable him to make submissions and for personal hearing. The respondents handed over the hard copy of the show cause notice dated 27th June, 2023. Thereafter, on 21st July, 2023, an Order-in-Original came to be passed.

HELD

The Hon’ble Court observed that the impugned order came to be passed within two weeks from the date of application for adjournment, without the respondents replying to the request for adjournment of the petitioner. The Court further held that the respondents ought to have also complied with the provisions of section 75(4) and provided an opportunity for a hearing where any adverse decision was contemplated against such a person. The Hon’ble Court held that since there has been a violation of principles of natural justice and the mandatory provision of section 75(4) of the CGST Act, the impugned Order was quashed with a direction to decide the matter afresh and for passing a reasoned order after considering the submissions made by the petitioners.

Note: The attention is also invited to the decision in the case of Cart2India Online Retail (P.) Ltd. vs. UOI [2023] 157 taxmann.com 212 (Bombay) wherein the Hon’ble Court held that where the petitioner had sufficiently indicated that he needed a personal hearing, merely because the petitioner did not appear on a scheduled date, in the absence of a valid reason, it should not have been presumed by the State Tax Officer that the petitioner is not interested in hearing.

79 Saloom Trading vs. Superintendent, Central Goods and Services Tax and Central Excise
[2023] 157 taxmann.com 46 (Kerala) 
Date of Order: 22nd November, 2023 

The Hon’ble Court recorded a prima facie view that the benefit of waiver of late fees for delay in filing of GSTR-9 for F.Ys. 2017–18 to 2020–21, granted by Notification No.8/2023 dated 31st March, 2023, should also be extended to persons who have filed the returns before 1st April, 2023. 

FACTS

The issue before the Court was whether the benefit of waiver of late fee for delay in filing of GSTR-9 for the financial years from 2017–18 to 2021–22 filed during the period 1st April, 2023 to 31st August, 2023 as provided in Notification no. 08/2023 dated 31st March, 2023 should be extended to persons who have filed GSTR-9 before 1st April, 2023.

HELD

The Hon’ble Court granted one week’s time to file an affidavit on what basis different treatment is sought to be given to assessee’s filing GSTR-9 prior to  1st April, 2023, and thereafter for the purpose of treating differently for the purpose of benefit under the Amnesty Scheme. However, the Hon’ble Court recorded a prima facie view that any person who has filed GSTR 9/9C in respect of the financial years 2017–18, 2018–19, 2019–20, 2020–21, 2021–22 up to 31st August, 2023 should be eligible for the concessional late fee as mentioned in the said notification.Otherwise,it would amount to a violation of Article 14 of the Constitution of India since no intelligible differentia is coming out from the Scheme to differentiate an assessee/dealer who had filed GSTR-9/9C before 1st April, 2023 and an assessee/dealer who has filed GSTR-9/9C in between 1st April, 2023 to  31st August, 2023.

80 Nexus Motors (P.) Ltd vs. State of Bihar
[2023] 157 taxmann.com 538 (Patna) 
Date of Order: 30th November, 2023 

Although Notification No.53/2023-CT restricts the benefit of Amnesty allowing belated filing of appeals beyond the condonable period for orders passed up to 31st March, 2023, the High Court extended the said benefit even where the impugned order was passed after the said date stating that the order passed in at least three months before the date of the said notification i.e., 2nd November, 2023 should be considered for the beneficial treatment. 

FACTS

The proper officer passed the order in original on  27th April, 2023, which was challenged by the petitioner before the first appellate authority five days after the condonable period of one month for filing of appeal u/s 107(4) of the CGST Act had expired.

HELD

The Court held that there is no power vested either in the Appellate Authority or in a Constitutional Court acting under Article 226 to extend the period of limitation, especially when there is a specific stipulation and period prescribed for the purpose of filing a delayed appeal. The Court however referred to the Amnesty Scheme notified under Notification No.53/2023- CT dated 2nd November, 2023, permitting the belated filing of appeal only in respect of orders passed by the proper officer on or before 31st March, 2023. The Court held that there is no rationale for the date of 31st March, 2023 fixed as a cut-off date and that the Notification itself was brought out on 2nd November, 2023. The Hon’ble Court therefore held that in such circumstances any order passed during at least three months before that date; the time provided for filing an appeal, ought to have been considered for such beneficial treatment. The Court, therefore, allowed the benefit under the notification to the petitioner and the order rejecting the appeal was set aside.

81 Diamond Beverages (P.) Ltd vs. Assistant Commissioner of CGST & CX
[2023] 157 taxmann.com 479 (Calcutta) 
Date of Order: 15th December, 2023 

A show cause notice reproducing the reply of the appellant and containing allegations without dealing with the contentions of the appellant cannot be said to have been issued with proper application of mind. Such a notice issued without considering the reply to the pre-show cause notice and without conducting any inquiry or investigation at the supplier’s end is liable to be set aside. 

FACTS

The appellants were issued certain notices pointing out certain discrepancies and alleging that the appellants had availed/utilised input tax credit during the financial year 2018–19 on suppliers whose registration was cancelled retrospectively, and who had not filed GSTR3B Returns during the financial year 2018–19. The appellants filed a reply to the said notices from time to time. However, without considering the said reply to a pre-show cause notice in Part -A of Form DRC-01A was issued to the appellant computing a demand pertaining to the same allegations. The appellant submitted a very detailed reply to the pre-show cause notice giving all the factual details and also placing reliance on certain decisions of this Court as well as the Hon’ble Supreme Court. The appellant specifically sought an opportunity for a personal hearing. However, the impugned show-cause notice was issued to the appellant without considering the said reply. On challenging the said show cause notice, the learned Single Judge Bench disposed of the writ petition by directing the appellants to submit a reply to the show cause notice and raise all issues of facts as well as on law and also place the decisions on which they placed reliance. Aggrieved by the same, the petitioners filed an appeal before the division bench.

HELD

The Hon’ble Court noted that essentially, in their replies the appellants requested the authority to investigate at the supplier’s end, where there was an allegation of retrospective cancellation of the supplier’s registration and allegations, where the suppliers did not file the returns for the concerned financial year. The court therefore held that the authority was required to examine the reply given in the pre-show cause notice and considering the nature of allegations in the pre-show cause notice, it was supposed to investigate or inquire into the matter by taking note of the relevant details at the supplier’s end. The court further held that if that is not done, the true facts will not emerge and consequently, issuance of any show cause notice will be a fait accompli. The Hon’ble court noted that in the instant case, the authority has not conducted any such investigation and proceeded to issue the impugned show cause notice under section 73(1) of the Act.

The department argued that the replies given by the assessee were considered before issuing the impugned show cause notice. The Hon’ble Court observed that except for extracting the reply given by the appellants, the authority has not dealt with the contentions that were placed by the appellants in the reply to the pre-show cause notice. The court therefore held that the show-cause notice has been issued without due application of mind. Accordingly, the impugned show-cause notice was set aside and the matter is remanded back to the adjudicating authority to the stage of pre-show cause notice.

Recent Developments in GST

A. NOTIFICATION 

 

Notification No. 54/2023-Central Tax
dated 17th November, 2023

 

By above notification, the notification 27/2022 dated 26th December, 2022, is amended to notify Biometric Based Aadhaar authentication for GST registration in Andhra Pradesh.

 

B. ADVISORY / INSTRUCTIONS 

 

a) The GSTN has issued Advisory dated 14th November, 2023, for Online Compliance pertaining to ITC mismatch-GST-DRC-01C.

 

b) Further Advisory dated 14th November, 2023, regarding ITC reversal on account of Rule 37(A) is issued.

 

c) Advisories dated 10th November, 2023, and 28th November, 2023, regarding procedure for provision related to the amnesty for tax payers who missed the appeal filing deadlines for the orders passed on or before 31st March, 2023, are issued.

 

d) Advisory dated 1st December, 2023, is issued about two-factor authentication for Taxpayers.

 

e) Further Advisory dated 1st December, 2023, regarding Pilot Project of Biometric-Based Aadhaar Authentication and Document verification, of GST registration applications of Andhra Pradesh, is issued.

 

f) Instruction No. 4/2023-GST dated  23rd November, 2023, is issued which is regarding serving of the summary of notice in Form GST-DRC-01 and uploading of summary of order in Form GST-DRC-07 electronically on the portal by the proper officer.

 

C. ADVANCE RULINGS

 

45. Liability on Canteen recovery — ITC — Inward transportation service 
Kirby Building Systems & Structures India P. Ltd. (Order No. A. R. Com/21/2022
dated 15th November, 2023, (Telangana)) 

 

The facts are that the applicant M/s. Kirby Building Systems & Structures India Private Limited, Sangareddy, is into the manufacture and supply of pre-engineered buildings and storage racking systems. They provide canteen and transportation facilities to its employees at subsidised rates as per the terms of the employment agreement entered between the applicant and the employees.

 

In light of the above agreement, the applicant further submitted that by virtue of Section 46 of the Factories Act, 1948, they are obliged to run and maintain a canteen for their employees and for said purpose they are procuring canteen services from a third party who in turn is issuing invoice to the applicant by charging GST at a rate of 5 per cent.

 

The applicant submitted its say in brief as under:

 

“i. According to the applicant the canteen facilities provided to its employees do not qualify as supply u/s. 7 of the CGST Act and therefore no GST is leviable on the same.

 

ii. The applicant further relies on clarification provided by CBIC in Circular No. 172/04/2022 dt: 06.07.2022 and the press release no. 73/2017 dt: 10.07.2017 wherein it was clarified by the CBIC that prerequisites provided by the employer to its employees in terms of contractual agreement will not be subjected to GST.

 

iii. Further the applicant claims eligibility to ITC on the GST paid on canteen services in terms of provision to Section 17(5)(b) of the CGST Act, 2017 wherein it is provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.”

 

In respect of transportation service to employees, the applicant submitted that they are arranging for transportation facilities for the employees and recovering nominal amounts from the employees’ salaries towards the cost incurred for providing such transportation facility, without any commercial objective. It was submitted that:

 

“i. Such supply of transportation service shall not be treated as supply in terms of Section 7 of the CGST Act, 2017.

 

ii. That vide Notification No. 12/2017 dt: 28.06.2017, the intra-state supply of transport of passengers in non-air conditioned contract carriage, excluding tourism shall be exempted from the payment of Central tax; and that they are providing a service for transport of passengers in non-air conditioned contract carriage and therefore the service provided by them is exempt from tax.

 

iii. That the applicant is procuring bus services to facilitate smooth functioning of his business in the course of furtherance of his business and the cost incurred by the applicant pertaining to the transport facility provided to its employees is the expenditure incurred by the applicant in terms of the contract between the employer and employee. Therefore, that the applicant is eligible for input tax credit on the tax paid on hire of such vehicles.”

 

With the above background, following questions were raised.

 

“1. Whether GST is liable to be discharged on the recoveries being made by the applicant from its employees towards the canteen and transportation facilities provided to them?

 

2. Whether the applicant is eligible to avail input tax credit in respect of the GST paid on inward supplies used for providing canteen and transportation facilities?”

 

The learned members gave their different but concurring orders.

 

The sum and substance of the said order is that the canteen facility is as per requirement of Factories Act,1948, and the applicant is entitled to recover the cost as per Rule 68 of AP Factories Rules,1950, as adopted under Telangana Factories Rules.

 

The ld. members, in general, observed that if cost is fully recovered, then no cost will be borne by the applicant and hence no ITC. However, if only nominal amount recovered and rest born as cost, then the applicant will be eligible to ITC, as it is allowable as per section 17(5)(b) read with proviso thereto.

 

In respect of traveling inward, the ld. members were of the view that it is not under any statutory requirement but in the nature of personal consumption for employees.

 

Therefore, on inward transportation service, ITC is not eligible in view of section 17(5)(b), observed the ld. AAR.

 

On the supply outward side in both cases, it is held that if the providing service is as part of perquisite, then no liability to GST, but if it is against consideration as business, then such action will be liable to GST.

 

The ruling given by ld. AAR is as under:

 

Questions Ruling
1. Whether GST is liable to be discharged on the recoveries being made by the applicant from its employees towards the canteen facilities provided to them? If it is by way of perquisites not liable. However, if canteen services as a business are liable to GST.
2. Whether the applicant is eligible to avail input tax credit in respect of the GST paid on inward supplies used for providing canteen facilities? ITC will be eligible in view of section 17(5)(b).
3. Whether GST is liable to be discharged on the recoveries being made by the applicant from its employees towards the transportation facilities provided to them? If it is by way of perquisites not liable. However, if such services as business are liable to GST.
4. Whether the applicant is eligible to avail input tax credit in respect of the GST paid on inward supplies used for providing transportation facilities? No ITC as it will be personal consumption.

 

46 Supply by sub-contractor to Contractor — separate supply than by principal contractor to its contractee 
Immense Construction Co.
(Order No. A.R. Comm/13/2023
dated 13th November, 2022 (Telangana))

 

The Applicant M/s Immense Construction Company is a Firm registered under the Goods and Services Tax Act, 2017. It undertakes contracts / subcontracts of the entire work for Operation and Maintenance of Water Supply Projects / Sewerage Projects / Facilities.

 

The Applicant is awarded a contract by M/s. The Indian Hume Pipe Company Ltd. (referred to as “Principal Contractor”).

 

The Principal Contractor is awarded a contract by the State of Telangana, Mission Bhagiratha.

 

The subcontract agreement is carved out of the Principal Contract, and it clearly indicates scope of the work to be undertaken and obligations of such subcontractor. The conditions of subcontract also provide that the subcontract agreement is liable to termination if the work is not executed and maintained as per Guidelines of Mission Bhagiratha, State Government of Telangana.

 

It is also mentioned by applicant that value of goods is not more than 25 per cent of the subcontracted value (as can be verified from the Contract so awarded) and therefore exempted from payment of GST in terms of entry 3A in Notification No. 12/2017 – Central Tax (Rate) as amended by Notification No. 2/2018 Central Tax (Rate) dated 25th January, 2018; and that the subcontract only for supply of Man Power is Pure Service and hence exempted from payment of GST in terms of Entry 3 in Notification No. 12/2017 – Central Tax (Rate) as amended by Notification No. 2/2018 – Central Tax (Rate) dated 25th January, 2018.

 

The applicant further presented its Interpretation of Law for each of the above questions as under:

 

“a) That services provided by the Applicants are Pure Services;

 

b) That these services are ultimately provided to the State Government of Telangana;

 

c) That these services are in relation a function entrusted to a Municipality under Article 243W of the Constitution (the present work falls under Serial No. 5 of 12th Schedule being water supply for domestic purpose);

 

d) That the services are covered by the Entry No. 3 of Notification No. 12/2017 Central Tax (Rate) dated 28th June, 2017;

 

e) That the Applicant draws support from Circular No. 147/16/2011-Service Tax dated 21st October, 2011 issued under the erstwhile Service Tax regime wherein under similar situations the Department had clarified that the services provided by the subcontractors to the main contractors in relation to those very projects which are classifiable as Infrastructure Projects Works Contract Services, then they too will get the benefit of exemption so long as they are in relation to the very same Infrastructure Projects i.e. WCS;

 

f) That the Applicant also draws support from the observations of the Hon’ble Apex Court in the case of State of Andhra Pradesh vs. Larsen and Toubro 17 VST 1 (SC) – 2008-VIL-30-SC wherein it was submitted by the Company and upheld by the Court that the transfer of property in goods, as effected by the sub-contract, resulted in direct sale to the Contractee and consequently it did not involve multiple sales either in favour of the main contractor or in favour of the Contractee.”

 

In respect of ‘Pure Service’ they further submitted that the said transaction is covered by Notification No. 12/2017- Central Tax (Rate), dated 28th November, 2017, as amended by Notification No. 2/2018 dated 25/01/2018 under Entry 3 and it is exempt from Tax.

 

With above facts, following questions were raised:

 

“a. Whether the supply of Services by the Applicant to M/S. THE INDIAN HUME COMPANY LTD. is covered by Notification No. 12/2017- Central Tax (Rate), dated 28th November, 2017 as amended by Notification No 2/2018 – Central Tax (Rate) dated 25/01/2018;

 

b. If the supplies as per Question (a) are covered by Notification No. 12/2017 Central Tax (Rate), dated 28th November, 2017 as amended by Notification No 2/2018 Central Tax (Rate) dated 25/01/2018, then what is the applicable rate of Tax under the Goods and Services Tax Act, 2017 on such Supplies; and

 

c. In case, if the supplies as per Question (a) are not covered by the Notification supra then what is the applicable rate of tax on such supplies under the Goods and Services Tax Act, 2017.”

 

Based on above, the ld. AAR observed that the basic enquiry in this proceeding is regarding.

 

“1. Whether the supply of works contract services by a contractor and his procurement works contract services constitute two independent taxable events under the CGST Act.

 

2. Whether an exemption extended to a contractor supplying works contract services is applicable to his procurement of works contract.”

 

The ld. AAR made reference to the Notification No. 12/2017 – Central Tax (Rate), dated 28th June, 2017, which is amended vide Notification 2/2018 – Central Tax (Rate), dated 25th January, 2018, to include entry 3A in same in order to exempt works contract with value of supply of goods less than 25 per cent, when the said supply is made to the Central Government, State Government or Local Authority, etc., and if the activity is related to any function entrusted under Article 243G or 243W of the Constitution of India.

 

The ld. AAR observed that the exemption is not a general exemption but subject to conditions that the supply has to be made to Central Government, State Government or Local Authority, etc. The ld. AAR found that there is no mention in entry of sub-contractors making supply of such services to a contractor who in turn is making supplies under entry 3A of Notification 12/2017, as amended above.

 

The ld. AAR, making reference to judgments, held that the exemption entry is to be interpreted strictly. It is also observed that where it is felt necessary, the Government has mentioned the category of sub-contract also for grant of concession like, in Notification no. 1/2018 – Central Tax (Rate) dated 25th January, 2018, r/w. Notification no. 11/2017. The ld. AAR observed that though the CGST Act does not define a subcontractor, however, the Notification 11/2017, as amended, makes a mention of the subcontractor whose services are procured by the main contractor. Accordingly, the ld. AAR observed that the Scheme of the Act clearly identifies the subcontractor as a supplier of works contract services to the main contractor.

 

With above observations, the ld. AAR passed ruling as under:

 

“Questions Ruling
a. Whether the supply of Services by the Applicant to M/S. THE INDIAN HUME COMPANY LTD. is covered by Notification No. 12/2017- Central Tax (Rate), dated 28th November, 2017 as amended by Notification No. 2/2018 – Central Tax (Rate) dated

25th January, 2018;

 No
b. If the supplies as per Question (a) are covered by Notification No. 12/2017 Central Tax (Rate), dated 28th November, 2017 as amended by Notification No. 2/2018 Central Tax (Rate) dated

25th January, 2018, then what is the applicable rate of Tax under the Goods and Services Tax Act, 2017 on such Supplies; and

 Not Applicable
c. In case if the supplies as per Question a are not covered by the Notification supra then what is the applicable rate of tax on such supplies under the Goods and Services Tax Act, 2017. 9 per cent CGST + 9 per cent SGST”

 

47 Business — Composite Supply in Education / Healthcare Services 
Kasturba Health Society (Order No. MAH/AAAR/DS-RM/13/2022-23
dated 5th December, 2022, (MAH)) 

 

The facts are that the appellant had earlier filed an AR application, which was rejected. Against the said rejection, appeal was filed before AAAR. The said appeal was also rejected. Therefore, a writ petition was filed in Bombay High Court and Hon. Bombay High Court directed the authorities to decide the question raised in the AR application. Accordingly, the AAR decided issues vide its order in GST-AAR-120/2018-2019/B-90 dated 30th November, 2021. Some questions were decided against the appellant and hence, this appeal was filed before AAAR.

 

The basic facts are that the Kasturba Health Society was formed as a Charitable Institution by way of Registration under the Societies Registration Act, 1860, and also under The Bombay Public Trust Act, 1950, with the sole objective of attending the health needs of rural India.

 

The Appellant society was also registered under Section 12AA of the Income Tax Act, 1961, and it has other registrations also.

 

The appellant is imparting Medical Education, till Post Graduation. The appellant has its setup in the form of a “Medical College” named as “Mahatma Gandhi Institute of Medical Science”, at Village Sewagram. Dist. Wardha, which is attached with a clinical laboratory named as “Kasturba Hospital”.

 

The appellant was not registered under earlier BST/MVAT Act or Service Tax. However, entertaining doubt, this application for AR was filed under GST.

 

The questions put forward by appellant in its AR application and its replies by AAR are as under:

 

i. Whether the applicant, a Charitable Society, having the main object and factually engaged in imparting Medical Education, satisfying all the criteria of “Educational Institution”, can be said to be engaged in the business so as to cast an obligation upon it to comply with the provisions of Central Goods and Service Tax Act, 2017, and Maharashtra Goods and Service Tax Act, 2017 in totality.

 

Reply: Appellant engaged in business.

 

ii. Whether the applicant, a Charitable Society, having the main object and factually engaged in imparting Medical Education, satisfying all the criteria of “Educational Institution” is liable for registration under the provisions of section 22 of the Central Goods and Services Tax Act, 2017 and Maharashtra Goods and Services Tax Act, 2017, or it can remain outside the purview of registration in view of the provisions of section 23 of the said act as there is no taxable supply.

 

Reply: Liable for registration.

 

iii. In a situation, if above questions are answered against the contention of the appellant institution, then following further questions were raised for the kind consideration by the Honourable Bench.

 

a. Whether the fees and other charges received from students and recoupment charges received from patients (who is an essential clinical material for education laboratory) would constitute as “outward supply” as defined in section 2(83) of The Central Goods and Service Tax Act, 2017 and Maharashtra Goods and Service Tax Act, 2017, and if yes, then whether it will fall in classification entry at Sr. No. 66 or the portion of nominal amount received from patients (who is an essential clinical material for education laboratory) at Sr. No. 74 in terms of Notification 12/2017 Central Tax(R) – dated 28th June, 2017.

 

Reply: Charges are exempt from GST.

 

b. Whether the cost of Medicines and Consumables recovered from OPD patients along with nominal charges collected for Diagnosing by the pathological investigations, other investigation such as CT-Scan, MRI, Colour Doppler, Angiography, Gastroscopy, Sonography during the course of diagnosis and treatment of disease would fall within the meaning of “composite supply” qualifying for exemption under the category of “educational and /or health care services.”

 

Reply: Charges are exempt from GST.

 

c. Whether the nominal charges received from patients (who is an essential clinical material for education laboratory) towards an “Unparalleled Health Insurance Scheme” to retain their flow at one end for the purpose of imparting medical education as a result to provide them the benefit of concessional rates for investigations and treatment at other end would fall within the meaning of “supply” eligible for exemption under the category of “Education and/or Health Care Services.”

 

Reply: The charges are liable to 18 per cent GST. 

 

d. Whether the nominal amount received for making space available for essential facilities needed by the students and staffs such as Banking, Parking, Refreshment, etc. which are support activities for attainment of main activities and further amount received on account of disposal of wastage would fall within the meaning of “supply”, qualifying for exemption under the category of “educational and / or health care services”.

 

Reply: The charges are liable to 18 per cent GST.

 

This appeal was filed against the above ruling of ld. AAR. In appeal, the appellant mainly contended that it is not doing any business and, therefore, GST not applicable to it.

 

Similarly, the ruling about taxability of charges was contested as erroneous.

 

In the course of appeal, the department also made its submission and reiterated that the AR is correctly decided.

 

The ld. AAAR thereafter analysed the argument of both sides.

 

Regarding the first issue as to whether the impugned activities of Appellant of providing educational services by way of imparting medical education through MGIMS, and providing the health care services through Kasturba Hospital, can be construed as “Business” in terms of the provisions of CGST Act, 2017, the ld. AAAR examined the definition of “Business” provided under section 2(17) of the CGST Act, 2017.

 

The ld. AAAR also observed that the appellant is doing such job or work which requires the services of highly educated, trained and skilled persons in the form of doctors hired by them for imparting the medical education to the students and hence, the said work done by the appellant is in the nature of “profession”, and accordingly, it is to be construed as “business” in terms of the GST provisions. The provision of health care services by the Appellant through its establishment, Kasturba Hospital, is also “profession” as envisaged under the definition of the term “business” provided under the GST law. The ld. AAAR held that the appellant is in business.

 

The ld. AAAR also examined whether the said activities of educational services and health care services undertaken by the Appellant will be construed as “supply” in terms of section 7(1)(a) of the CGST Act, 2017 or not. The definition of “supply” also reproduced as under:

 

“Section 7

 

(1) For the purposes of this Act, the expression ‘supply’ includes-

 

(a) ‘all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.’”

 

The ld. AAAR observed that following criteria is to be fulfilled for activity to be ‘supply’.

 

“i. that such supply should be made by a person for a consideration;

 

ii. that such supply should be made in the course or furtherance of business;”

 

The ld. AAAR held that the appellant fulfils criteria of being a person, the activity being in the course of business and hence, the activities are ‘supply’ under GST.

 

Coming to the next issue about exemption, the ld. AAAR held that the activities of imparting medical education
to the students squarely fit under entry at Sl. No. 66 of the exemption Notification No. 12/2017-C.T. (Rate) dated 28th June, 2017, which reads as under:

 

“Sl.

No.

 Chapter, Section, Heading, Group or Service Code (Tariff) Description of Services Rate

(percentage)

 Conditions
66 Heading 9902 Services provided – (a) by an educational institution to its students, faculty and staff; NIL NIL”

 

The ld. AAAR observed that the services of medical education provided by the Appellant-Society is recognised by the Maharashtra University of Health Sciences, Nashik and Nagpur University, hence it falls under the category of “educational institution” as defined under the GST law, and accordingly, the ld. AAAR held that the medical education services provided by the Appellant to the students will attract NIL rate of GST as per the aforesaid entry 66, and allowed it as exempt.

 

Regarding the second activity of the health care services also, the ld. AAAR held that it will squarely fit under the entry at Sl. No. 74 of the exemption Notification No. 12/2017-C.T.(Rate) dated 28th June, 2017, which reads as under:
“Sl.

No.

 Chapter, Section, Heading, Group or Service Code (Tariff) Description of Services Rate

(percentage)

 Conditions
74 Heading 9993 (a) Services by way of (a) health care services by a clinical establishment, an authorized medical practitioner or paramedics;

(b) services provided by way of transportation of a patient in an ambulance, other than those specified in (a) above.

 NIL NIL”

 

The ld. AAAR observed that the services of appellant are ‘health care services’ and will be exempt from the payment of GST in terms of the entry at Sl. No. 74 above.

 

The learned AAAR observed that the above services are ‘outward services’ as appellant receives charges from students and recoupment charges from patients which constitute consideration for outward supply.

 

Accordingly, the ld. AAAR held that the core services of the Appellant, viz. provision of medical education to the students and provision of health care services to the patients, are exempted supplies.

 

In respect of cost of medicines and consumables recovered from OPD, patients along with nominal charges collected for diagnosis etc. during the course of diagnosis and treatment of disease, the ld. AAAR held that they are covered by scope of ‘composite supply’ as defined in section 2(30) of GST Act.

 

The ld. AAAR, therefore, held that they are exempt along with core health care services.

 

Regarding the recovery under the second activity, namely, “Unparallel Health Insurance Scheme” under which the Appellant collects a nominal specific amount from the public who intends to avail the health care services from the Appellant in future at the concessional rate, the ld. AAAR observed that it is not an insurance service in real terms as it is not under licence from IRDAI. The AAR has classified the said activities as liable to GST at 18 per cent. However, the ld. AAAR concurred with the Appellant’s contention that the said nominal amount being charged by them are in the nature of advances towards the provision of the health services which would be provided to the subscribers of the said scheme. Therefore, the ld. AAAR held that receipts are eligible for exemption under the entry at Sl. No. 74 of the exemption Notification No. 12/2017-C.T. (Rate) dated 28th June, 2017.

 

Regarding further activity of providing space for the facilities, like Banking, Parking, Refreshment Canteen, etc., the ld. AAAR observed that the said activities are not directly provided to the students or patients, who are the recipients of the main services of the Appellant. The receipts are from third parties for renting of immovable property by way of providing space for the facilities like banking etc., who are running these establishments on their own account.

 

The ld. AAAR held that they are, therefore, not composite supply as not provided to the same one person but two separate persons.

 

Accordingly, the ld. AAAR held the said receipts taxable at the applicable rate of 18 per cent.

 

In respect of receipts on account of disposal of wastes such as medical equipment, apparatus and other instruments, etc., by selling them to the interested vendors, the ld. AAAR held them as independent activity and hence ruled as liable to tax.

 

Accordingly, the ld. AAAR concurred with replies of AAR mentioned in questions (i), (ii), (iii)(b) and (iii)(d). The ld. AAAR modified the ruling in respect of (iii)(a) and (iii)(c) to hold said activities as exempt.

 

Classification — ‘Honeycomb paper for wrapping’
V. M. Technocoatings (AR No. UP-ADRG-11/2022 dated 30th August, 2022 (UP)) 

 

The applicant is undertaking a process to prepare eco-friendly expandable paper wrap (replacement of bubble wrap) from kraft paper and to sell the same in open market.

 

The process is explained as under:

 

“First they prepare the core material by using the two or more sheets of honeycomb like structure kraft paper which is glued together in an alternate glue strip pattern to create structure of multiple layers of kraft paper in vertical direction. These corrugated layers open out in the form of continuous honeycomb like grid with center of each corrugated strip attached to another layer of corrugated strip upon expansion. Depending upon the product being packed with this material, multiple paper honeycomb wrap may be glued together to make specific design of packing material.

 

These paper honeycomb used in the primary packing of goods as a cushioning material, separators or edge protector, to make shipping cartons of goods and as pallets and pallet boxes.

 

This paper honeycomb wrap consists of 80 to 90% of kraft paper and rest is other adhesive, hence this paper honeycomb wrap classifies under HSN 4808 category. Contrary to this, 4823-chapter heading is more oriented towards ‘other paper, paperboard, cellulose wadding and webs of cellulose fibers’ etc. and not specific to kraft paper products.”

 

The applicant made reference to the fact that the main raw material to make honeycomb wrapping paper contains 80–90 per cent of kraft paper, and the rest other things are consumable items.

 

Reliance placed on order of Karnataka AAR in the case of M/s. Lsquare Ecoproducts Pvt. Ltd. (2020 (37) GSTL 394 (AAR-GST-Kar-2020-VIL-123-AAR)) where in it held as below:

 

“Therefore, on verification of the structure and purpose for which kraft paper honeycomb board or paper honeycomb board used are similar to the corrugated paperboard (listed under 4808 10 00), only difference is that this paper honeycomb board consists of honeycomb like structure core material at the center and on either side of this one or more layer of kraft paper is glued by using adhesive with fluting direction being perpendicular to corrugated boards. Hence this honeycomb paperboard classified under the Heading 4808 90 00 as other instead 4808 10 00.”

 

In the above case, the same item is held as covered by heading 4808-9000 attracting GST at 12 per cent.

 

The applicant also referred to the setting of heading 4808 in Custom Tariff.

 

The ld. AAR also considered the submission of the department, wherein they submitted that the item is classifiable under Chapter Sub-heading No. 48239013.

 

The ld. AAR observed about meaning of ‘paper’ referring to dictionary as under:

 

Meaning of the said word is explained in The Shorter Oxford Dictionary [Volume 2 (Third Edition)] as- “a substance composed of fibres interlaced into a compact web, made from linen and cotton rags, straw, wood, certain grasses, etc. which are messed into a pulp, and pressed; it is used for writing, printing, or drawing on, wrapping things in, for covering the interior or walls, etc.”

 

Encyclopaedia Britannica says – “Paper, the general name for the substance commonly used for writing upon or for wrapping things in.”

 

In Unabridged Edition of the Random House Dictionary of the English Language the word “paper” has been defined as “a substance made from rags, straw, wood or other fibrous material, usually in thin sheets, used to bear writing or printing on or for wrapping things, decorating walls etc.”

 

As per Webster’s Dictionary- “Paper, a thin flexible material made in leaves or sheets from the pulp of rags, straw, wood or other fibrous material and used for writing or printing upon or for wrapping and various other purposes.”

 

Accordingly, the ld. AAR observed that in popular parlance the word “paper” is understood as meaning a substance which is used for writing or printing, or for packing or for drawing on, or for decorating, or covering walls.

 

The ld. AAR after referring to the process adopted by the applicant also made reference to judgment of Hon’ble Rajasthan High Court in the case of Deepak Agencies vs. Assistant Commercial Tax Officer, (1993) 90 STC 376 (Raj) to ascertain the meaning of ‘paper’.

 

The ld. AAR held that the intended use of the material in question should be the guiding factor for deciding the classification of the commodity.

 

The ld. AAR also referred to the scheme of classification under GST with reference to Notification no. 1/2017-Central Tax (Rate) dated 28th June, 2017, and also to General Rules for the Interpretation of Import Tariff which provides for classification of goods in this Schedule.

 

After examining the schedule of Tariff, the ld. AAR observed as under:

 

“As per Rule 3(a) of General Rules for the Interpretation of Import Tariff, the heading which provides the most specific description shall be preferred to headings providing general description. The Tariff item 48239013 contains specific description of Packing and wrapping paper. The product ‘eco-friendly expandable paper wrap (honeycomb paper for wrapping)’ is manufactured from the kraft paper and adhesives and the same is used in wrapping/packing as such Rule 3(a) of General Rules for the Interpretation of Import Tariff will apply and the same merits classification under HSN 48239013.”

 

After considering the above position the ld. AAR gave ruling as under:

 

“25. Ques. Whether HSN applicable to eco-friendly expandable paper wrap (honeycomb paper for wrapping) is 48239013 or 48084090?

 

Answer- The HSN code of the product namely “eco-friendly expandable paper wrap (honeycomb paper for wrapping) is 48239013.” 

Corporate Guarantee: Quasi Capital or Taxable Service

Business Conglomerates fund their SPVs, subsidiaries, joint ventures, etc., with self-generated capital and / or leveraged capital. The downstream entity may not be capable of attracting debt capital based on its own net-worth and would require an intervention of the parent entity to guarantee such debt. In many cases, they are also issued to notch-up the credibility of the debt entity and reduce the cost of debt capital.

These Guarantees are reported in the financial statements (as contingent liabilities), Transfer pricing reports (as international transactions), Bank sanction letters and have caught the taxman’s eye of a possible revenue leakage, creating significant litigation under the Direct and Indirect Taxes domain. Therefore, it would be apt to unravel the concept of Guarantees, their forms / types, and the tax exposure they carry under the GST law.

COMMERCIAL UNDERSTANDING

Guarantees are contracts which grant the financier of capital the “assurance” over the repayment capacity of the borrower and carry an “obligation” to make good any default by the borrower entity. In many cases, promoters / directors of the Company (being the deployers of the capital) are also roped into the financial arrangement and made personally liable in case of any default. Such guarantees may also be backed with realisable security (such as deposits, capital assets, mortgageable / pledge assets, etc.,) to secure any default of the guarantor itself.

TYPES OF GUARANTEES

1) Bank guarantees / performance bank guarantees — Banks and FIs issue Guarantees to third parties at the insistence of their customer securing the performance of a financial obligation by the said customer. These guarantees are backed with liquid or illiquid securities which secure any possibility of default by the entity whose obligations are being underwritten. These are issued in Government / large contracts where a contractor must project his financial commitment to deliver such contracts. Banks charge a guarantee commission for the issuance of such guarantee which is liable to GST.

2) Corporate / personal guarantees — Banks / FIs insist that debt capital is supported by due corporate guarantees from their parent entities and hence incorporate guarantee conditions. The parent companies may not charge any fee from the funded entity towards such a guarantee. Promoters / Directors, etc., also extend personal guarantees and are barred from recovering any fee from the related entity in terms of the RBI Master Circular No. RBI/2021-22/121 dated 9th November, 2021.

3) Commercial / standby letter of credit (LC) — This is used commonly in international trade1. LC is an undertaking, or a guarantee issued, generally by a Bank, to pay to the beneficiary a certain or determinable amount upon simple demand or on presentation of specified documents. Commercial LCs are distinct from standby LCs to the extent that the former involves an upfront payment obligation to the beneficiary while in the case of the latter, the payment obligation is triggered only on a default by the person whose obligation is being guaranteed. Like the Bank guarantee commission, the LC issuance fee is liable to GST.

4) Contractual Performance Guarantee — Similar to bank performance guarantee, the parent entity also guarantees that its SPV, being the awardee of the contract, would successfully and satisfactorily execute the obligations under the contract. It also includes a guarantee that the contract would be performed with the material and workmanship meeting the required standards.

5) Letter of Comfort — Letters of comfort are issued by the Parent entity, more as a moral commitment rather than a legally binding obligation, to discharge the debts of the funded entity in case of there being any default therein. No explicit cost is charged either by the bank / FI from the parent entity for this facility.

Among the above, guarantees by third parties (such as Banks / FIs) are simple and against valuable consideration, and are clearly chargeable to GST. Other forms of guarantee involving related entities (such as Corporate / personal Guarantees, etc.,) have come to the forefront regarding the applicability of GST, in the absence of any visible consideration in the contract. We could address this by going back to the genesis of guarantees from the Contract Act.

1. Governed by Uniform Customs & Practice for Documentary Credits (UCP-600)

INDIAN CONTRACT ACT, 1872

Chapter VIII of the Indian Contract Act, 1872 titled as “Indemnity and Guarantee” contains special provisions for Contract of Guarantee:

“126. A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.

127. Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee.

145. In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety, and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but, no sums which he has paid wrongfully.”

Contracts are a set of promises and counter-promises wherein each party undertakes an obligation for the benefit of the other. Section 2 of the Contract Act beautifully lays down the sequence in the formation of a contract – a proposal by the promisor, its acceptance by the promisee, leading to an agreement between the promisor and promisee and then finally being sealed as an enforceable contract. Guarantees are one such type of contract of counter-promises which have to evolve through this very same process.

Unlike typical contracts, the definition of guarantee identifies three parties to a contract – “Surety / Guarantor” giving the guarantee, such guarantee being given to the “principal creditor” and the guarantee being rendered in respect of the default of “principal debtor”. The subject-matter of the guarantee (when invoked by the Creditor) could be the “performance of a promise” or “discharge of a liability” of the principal debtor. Each of these terms / phrases are significant and have to be specifically identified in a contract of guarantee. Pictorially it would appear as follows:

Speaking in contract language, the Surety promises / assures the Creditor that the financial assistance proposed to be issued to the Debtor is backed by its guarantee and in the event of the default being committed by the Debtor, the Surety would step into the shoes of such debtor and make good the financial assistance which has been rendered to the Debtor. In the tri-party arrangement, the liability of the debtor and the surety are co-extensive and alteration of the liability simultaneously alters the rights of both parties vis-à-vis the Creditor.

The subject-matter of a contract of guarantee flows from the Surety to the Creditor i.e. the promise of a guarantee, and the recipient of such guarantee is the Principal Creditor. It is against the promise of guarantee that the Principal Creditor extends the financial assistance to the Principal Debtor. Therefore, there are two sets of promises in such a scenario (a) one being the promise of guarantee by the Surety / Guarantor (as a promisor); and (b) the promise of rendering the due financial assistance by the Creditor to the debtor (being the consideration against the promise of guarantee). This would be crucial while applying the concept of supply and consideration under section 7 of the GST law (elaborated later).

After defining the contract of guarantee, section 127 now proceeds to define the consideration of the contract of guarantee. One may note that the Creditor and the Debtor are engaged in an independent debtor-creditor arrangement2. The contract of guarantee acts as a top-up to the underlying arrangement where the surety may not receive any direct benefit from the Creditor for extending its assurance / promise. As can be seen from the diagram above, the assurance / guarantee does not have any reciprocal flow of consideration back to the Surety / Guarantor either from the Creditor of Debtor. Thus, in the absence of any consideration, direct or indirect, flowing to the Surety, it was imperative that such contracts are given statutory enforceability, else may constitute a void contract. Section 127 fills this gap by stating that the ‘financial assistance to the Debtor’ against the ‘promise of Guarantee’ would constitute sufficient consideration to the Surety for a rendition of the promise of Guarantee. Technically speaking, the financial assistance to the debtor would constitute sufficient discharge by the Creditor under the contract of guarantee and the Surety cannot claim any further consideration from the Creditor for rendition of such guarantee. However, there is an option for the Surety, though no contractual obligation, to claim a consideration from the Debtor for agreeing to issue such a guarantee.

2. Mak Impex Chemicals vs. UOI AIR 2003 Bom 88

Section 128–144 of the said Act defines the rights, obligations, liabilities, and discharge of the Surety on account of the guarantee extended to the Creditor. Section 145 is critical as it defines the relationship between the Debtor and Surety—it states that there is an implied responsibility by the Debtor to ‘indemnify’ the Surety against all costs which the surety has rightfully incurred under the Contract of guarantee (including costs of defending suits, etc.,). This section grants legal protection to the Surety to proceed against the Debtor for recovery of all costs under this contract despite there being no express contract between these parties. This is akin to an implied contract of indemnity underlying the contract of guarantee and establishes an indemnifier-indemnity holder relationship.

REVENUE’S CONTENTION UNDER GST

Now turning to the revenue’s understanding of this arrangement. Revenue claims that Banks generally charge a fee from third parties for the issuance of Bank guarantees. Corporates issuing guarantees within group entities ought to charge a similar fee to be considered at arm’s length. The issuance of the guarantee is at the request of the related entity. Hence, there is a service being rendered by Surety in delivering a guarantee to the Bank. Thus, the transaction aptly fits into Entry 2/4 of Schedule I and is liable to tax in the hands of the Surety under the residuary services entry @ 18 per cent. In cases where the Surety is located outside India or personal guarantees are provided by Promoter-Directors, RCM is proposed by the Debtor Company as a “recipient” of Corporate Guarantee services. To further the case of the revenue, the GST council has inserted Rule 28(2) to provide a mechanism to value such services. A Circular has also been issued elaborating on the valuation methodology in corporate / personal guarantees.

APPLICATION OF GST LAW

With this backdrop, the points for examination would be as follows:

a) Is there any service between the Surety and the Debtor (as related persons) under a contract of guarantee?

b) Can the guarantee form part of the ‘shareholder function’ as it is provided by the parent company in respect of its related company whose shares it holds?

c) If at all there is a service being imputed under law, what is the taxable value of such service?

Section 7 of GST law stands upon four important pillars (a) an act of supply of goods / service; (b) supplier-recipient relationship; (c) consideration for such supply; (d) supply being in the course or furtherance of business. In cases where a service is being imported from outside India, it is taxable whether or not, it is in the course of business. In respect of related parties, Entry 2/4 of Schedule I excludes the requirement of ‘consideration’ for an activity to constitute a supply.

GST being levied on a transaction of supply can be termed as a “transaction-based tax” involving two or more persons. The Contract Act lays down the foundation for transactions which emanate from contracts between two or more persons. Thus, it is important to intertwine the contract law and the GST law to understand the deemed GST implications in case of related entities located either in India or outside India. The analysis is to take place in two parts (a) Cases where no commission / fee is charged for such activity from related parties (b) Cases wherein a specific charge is made from the related party for such activity. For analysis, “A” may be considered as the Creditor; “C” as the Debtor and “B” as the Guarantor / Surety for the Debtor, with B and C being related entities.

A) Cases where no fee is charged from the Debtor

Is there an Act / Contract of Supply between B and C?

The primary question is whether at all, there is a service being rendered by B to C by issuing guarantee to A, or is it a self-activity done by B for its own interest?

At the outset “activity of supply” should be viewed as emerging from an “enforceable contract” between the contracting parties. The essential elements of a contract should clearly be reflected in the contract of supply for it to be taxable under section 7 of GST law. Invalid, incomplete, or non-existent contracts cannot be considered as taxable or even imputable into section 7. The Bombay High Court in Bai Mamubai Trust3 placed the requirement of an enforceable contract and contractual reciprocity between parties as quintessential for a taxable supply. The Court very finely distinguishes payment of sums in respect of a disputed price of a taxable supply vs. payment of sums towards restitution or damages for an illegal act. Payment of sums for wrongful unilateral acts or damages were not emerging from reciprocal obligations and hence not considered as passing the “supply doctrine”.

Thus, the ingredients of the contract (as elaborated above) are core to the taxation of supply under GST. The terms supplier (promisor), recipient (promisee), the act of supply (promise) and consideration should be explicit and agreed upon by the contracting parties. If a transaction is to be considered as a supply, the contractual obligations and promises should also align with the act of supply i.e. if a service is said to be taxed between a supplier and a recipient, there has to be a contractual obligation by the supplier to render such a service to the recipient. Without any contractual obligation, a service cannot be said to have been agreed between the contracting parties. Gratuitous acts are not meant to be taxed under the GST law4. Thus, there is no room for intendment or imputation of a ‘contract’ even by way of a statutory fiction under section 7 of GST law.

3. 2019 (31) G.S.T.L. 193 (Bom.)
4. Circular No. 116/35/2019-GST, dated 11th October, 2019 issued on donations and free gifts

Contract of Guarantee is clearly between B and A under which the promise of guarantee flows from B to A. In consideration for the receipt of the guarantee from B, A renders financial assistance to C. Clearly, C is the only beneficiary of reciprocal obligations between A and B. Neither are B and C acting on behalf of each other while contracting with A. Both the parties have their respective obligations to A: C has its primary obligation to repay the financial debt and B has the co-existent secondary obligation to repay in case it is called upon to do so by A. C (though a witness / signatory) does not have contractual privity to the promise of guarantee. C’s obligation to A emerges from the separate loan contract between A and C. C cannot enforce any of the obligations or promises which is agreed upon between A and B and they stand on an independent footing.

Any supplier-recipient identification under GST law should have contractual authenticity. Similarly, the guarantee service sought to be deemed under Schedule I by the revenue should also possess valid contractual obligations between B and C. Yet Revenue through the CBIC Circular (discussed later) claims that there is a flow of guarantee service by B to C. If we attempt to implement the course adopted by the CBIC circular, we may reach a conclusion which is in direct opposition to sections 125 and 126 of the Contract Act:

Party Contractual Status GST imputed status Implication on account of deeming fiction
B Guarantor / Promisor Supplier of Guarantee B issuing the assurance to C that the Debt will be repaid by C
C Beneficiary of funds Recipient of Guarantee C would be receiving the promise of guarantee for the debt availed by itself
A Guaranteed entity / Promisee Neither supplier or recipient A would be considered as an outsider in this supplier-recipient relationship between B and C

The above table depicts the anomaly which results in imputing a contract of guarantee between B and C. The Contract Act does not identify or even deem any flow of a guarantee obligation by B to C. Therefore, any attempt to impute a contract of guarantee between B to C for the purpose of taxation would be fatal to commercial reality itself.

This brings us to the question as to the true nature of the relationship between B and C. The answer is spelled out in section 145 of the Contract Act. It states that Surety B has an implied right of indemnity against the Debtor C to the extent of financial loss incurred because of the contract of guarantee. Clearly, the consequence of any wrong-doing by C in defaulting in the payment obligation to A, would trigger A’s right to recover the sums from B. B after settling the debts due to A can now claim the said sums as damages indemnifiable under this implied contract. Therefore, the true relationship etched by the Contract Act is that of ‘indemnity’ rather than the act of service by B to C.

Then for what benefit does B issue a guarantee to A where no counter-benefit arises either from A or C? Does the act of agreeing to issue the guarantee constitute a legal obligation by B to C? Can C claim that by virtue of being an invested entity, it can enforce B to issue a guarantee for all the loans C avails from A? Certainly Not. B would have its own vested interests in issuing the guarantee in favour of C. Such issuance would be without any contractual consensus with C. Unless there is an agreed contract, C cannot as a matter of right direct B to issue a guarantee on its behalf. Thus, the issuance of the guarantee by B is on its own account and not ‘on behalf’ of C. Probably, B performs this act for protecting / enhancing its ownership interest in C. B may choose (out of its own volition) to refrain from issuing any guarantee, in which case, the only consequence would be that C may not receive the financial assistance and would be remediless without any legal recourse of B.

This therefore brings us to the commercial rationale of the issuance of Corporate / personal guarantees. As one would appreciate, a guarantee is issued by the Company / person on account of the ownership / financial interest over the entity for whom it is being issued. If not for such interest, the guarantee would not have been issued at all. Thus, the key driver for such a guarantee is the protection / enrichment of its own ownership interest in the subject entity and nothing beyond this. It is a ‘self-activity’ and does not warrant any counter-consideration either from the recipient or the debtor.

In transfer-pricing context, this act was termed as a ‘shareholder function’. Whether a corporate guarantee issued in favour of its subsidiary constituted an ‘international transaction between related parties’ warranting a benchmarking of the said activity to the arm’s length price. This issue was raised based on the definition of ‘international transaction’ (prior to 2012) which required a transaction between related parties having a bearing on the profits, incomes, losses or assets of the related entity. Taxpayers claimed that such issuance did not entail any explicit cost and was part of the shareholder obligation to adequately fund the entity for its business operations. Reliance was placed on OECD Transfer Pricing guidelines which is extracted below:

“Shareholding Activity – An activity which is performed by a member of an MNE (multinational enterprise group) (usually the parent company or a regional holding company) solely because of its ownership interest in one or more other group members, i.e. in its capacity as shareholder.”

When an Activity is considered / not considered as intra-group service

“7.6………………………..This can be determined by considering whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity in-house for itself. If the activity is not one for which the independent enterprise would have been willing to pay or perform for itself, the activity ordinarily should not be considered as an intra-group service under the arm’s length principle.”

“7.9. A more complex analysis is necessary where an associated enterprise undertakes activities that relate to more than one member of the group or to the group as a whole. In a narrow range of such cases, an intra-group activity may be performed relating to group members even though those group members do not need the activity (and would not be willing to pay for it were they independent enterprises). Such an activity would be one that a group member (usually the parent company or a regional holding company) performs solely because of its ownership interest in one or more other group members, i.e. in its capacity as shareholder. This type of activity would not be considered to be an intra-group service, and thus would not justify a charge to other group members. Instead, the costs associated with this type of activity should be borne and allocated at the level of the shareholder. ……”

“7.13. Similarly, an associated enterprise should not be considered to receive an intra-group service when it obtains incidental benefits attributable solely to its being part of a larger concern, and not to any specific activity being performed. For example, no service would be received where an associated enterprise by reason of its affiliation alone has a credit-rating higher than it would if it were unaffiliated, but an intra-group service would usually exist where the higher credit rating were due to a guarantee by another group member, or where the enterprise benefitted from deliberate concerted action involving global marketing and public relations campaigns. In this respect, passive association should be distinguished from active promotion of the MNE group’s attributes that positively enhances the profit making potential of particular members of the group. Each case must be determined according to its own facts and circumstances. See Section D.8 of Chapter I on MNE group synergies.”

The above extract clearly ruled out the possibility of an intra-group service to a related entity in case it incidentally benefited from a guarantee issued by its parent entity. A similar analysis was performed by the Income tax appellate Tribunal in Micro Ink’s case5 wherein it was examined whether corporate guarantees issued by the Parent Company were not in the nature of ‘provision for service’ but a shareholder function to the invested entity. A retrospective amendment in the definition of ‘international transaction’ vide Finance Act 2012 led to a deemed inclusion of Corporate guarantees as an international transaction. Yet, the decision in Micro Ink’s case considered the retrospective insertion and held that since the said guarantee did not meet the primary threshold of the ‘transaction having a bearing on profits, income, assets or losses’, it was still outside the ambit of the definition. However, subsequent to this, there was an overturn of decisions based on the High Court’s / Tribunal’s view6 that such activity was deemed to be an international transaction by virtue of an explicit amendment. While one may believe that this would have limited applicability in view of the distinct fabric of Income tax and GST law, it certainly leaves us with an important conclusion that in the absence of deeming fiction akin to ‘international transactions’ under Income tax, such corporate guarantees may not be considered as a transaction at all, but a self-activity as part of shareholders responsibilities and hence outside the tax net itself.

5. Micro Inks Ltd. vs. Addl. CIT [2015] 63 taxmann.com 353/[2016] 157 ITD 132 (Ahd. – Trib.)
6. PCIT vs. Redington (India) Ltd. reported in 122 taxmann.com 136 (Mad-HC) affirming Prolifics Corporation Ltd. vs. Dy. CIT – Hyderabad ITAT[[TS-497-ITAT-2014(HYD)-TP] ]; Infotech Enterprises Ltd. vs. Addl. CIT - Hyderabad ITAT [TS-159-ITAT-2018(HYD)-TP]; Nimbus Communications Ltd – Mumbai ITAT[TS-43-ITAT-2016(Mum)-TP]

SCOPE OF SCHEDULE I

The role of Schedule I also comes to the forefront when taxpayers claim that there is no service between the related parties and the activity is for ‘own account’. Revenue invokes Schedule I and claims that the relationship has disguised the performance of guarantee service between B and C. B has rendered the guarantee service and has deliberately not charged a consideration. Schedule I addresses such situations and brings to tax the service rendered by B to C.

Truly speaking, Schedule I has been legislated by virtue of section 7(1)(c) to give legal sanctity to acts without consideration in specified cases. If the law was to tax any and every activity (including self-activity), Schedule I need not have to be made so restrictive. Section 7(1)(c) could have simply stated that all acts without consideration are taxable as supply. The purpose of legislating limited entries in Schedule I is to identify commercial cases where consideration may not be charged on certain counts even-though there exists a contractual obligation (oral / written) between the parties concerned. The question to be asked before applying Schedule I is this – “Whether there exists any contractual obligation between the related parties?” If the answer is in the negative (like a gratuitous or self-act), one may not even enter Schedule I for application. To reiterate, Schedule I is designed only to fill the gap of consideration but not to deem / impute a contract itself between related parties.

This conclusion also emerges from the title of Schedule I which uses the phrase “Activities treated as supply even if without consideration” indicating that only activities which fall short of being treated as supply u/s 7(1) on account of a ‘lack of consideration’ would be deemed as supply. As a corollary, it means that a mere existence of a relationship would not constitute a supply of goods / services. There must necessarily be an identifiable supply under section 7(1), albeit absent a consideration, prior to invoking the entries in Schedule I. Guidance is obtained from the entries and adjunct circulars on this aspect.

  • Section 7(1)(c) itself deems an act as ‘Supply’ under Schedule I only if it is “made” or “agreed to be made”. Making of an agreement cannot be with oneself and requires the consensus of another person.
  • Use of the phrase ‘transfer’, ‘supply’, ‘import of service’ in the entries itself emphasise that other requirements of supply (u/s section 7(1)) are mandatory.
  • Supply being a commercial term is used in trade or business involving sale, transfer etc., for consumption. The deeming fiction in Schedule I is an extension of such supply-consumption theory;
  • In the context of goods, circulars have treated mere movement of goods without any transfer as not involving as supply (e.g., warranty replacement, job work movement, inter-state movement of goods rigs / equipment, free supply or gifts to customers, etc.,).
  • In the context of services, circular on liquidated damages, penalties, late payment charges etc., emphasise the requirement of an agreement or contract for the provision of service for the imposition of tax i.e., contractual relationship is an essential element of supply;

Thus Schedule I is to be invoked only when a service (guarantee or any other identifiable service) is provided between the related parties concerned. Any artificial imputation of a contract of guarantee between B and C would result in grave anomaly as tabulated above. It’s a different matter that revenue may claim that the activity is in the nature of a support function to agree to issue the guarantee, but certainly cannot claim it to be a guarantee service.

IS THERE A SERVICE PROVIDER — RECIPIENT RELATIONSHIP?

This now takes us to the question of whether at all there is a service provider-recipient relationship between the parent and related entity. Of course, once it is established that there is no service at all and the entire activity is a shareholder function, there is no requirement to examine this point. Yet to allay any doubts, an examination of the strict definition of service provider (supplier) and service recipient (recipient) can be made. Typically, revenue places the argument that an act of guarantee by the Surety constitutes a service provider-recipient relationship between the B as a service provider and the C as a service recipient. This is on the premise that a service flows from Surety to Debtor.

Supplier — Section 2(105) defines a supplier as the person supplying the service and includes an agent acting on his behalf. Under Section 126 of the Contract Act, the promise of the contract of guarantee (being the rendition of the service) flows from the Surety (say Parent Co / Director) to the Principal Creditor (Banks / FIs). In such contracts, the supplier of a service (if any), in terms of 2(105), is clearly the Surety / Guarantor who is issuing the promise of guarantee and rendering the service. Till this juncture the contract law and GST law are aligned as the Surety is the person who is rendering the guarantee promise and liable to be called a supplier.

Recipient — 2(93) defines a recipient as the person who is “liable to pay” the consideration for the rendition of service and where no consideration is payable, the person “to whom the service is rendered”. It is here where the legal error appears to be committed by the Revenue. Contractually, the service of guarantee is being rendered only to the Banks / FIs. Banks are also the ‘beneficiary of the guarantee obligation’ which is being issued by the Surety. In the eventuality of any default, the promise / assurance to recoup the loss endures to the benefit of the Creditor. The confusion arises because the ‘beneficiary of funds’ is mixed with ‘beneficiary of the guarantee service’. This fine distinction can only be solved by appreciating the contract law implications as elaborated above.

C has undoubtedly been the beneficiary of the loan, but that does not by implication make it the beneficiary of the guaranteed service. The loan may be disbursed as a consequence of the guarantee obligation. The debtor (except where a fee is being specifically charged) in no circumstance can be treated as the contractual recipient of the guarantee. Clearly, there is no service provider-recipient relationship between the B as a Surety and the C as Debtor. Thus, revenue’s contention that the Debtor is a ‘recipient’ of the guarantee service and liable to tax under reverse charge provisions fails on this front.

FLOW OF CONSIDERATION FOR SUPPLY?

One may traverse further into the scope of the term consideration. Section 2(31) defines consideration as any monetary or non-monetary act in response to or in respect of or for inducement of the act of supply. To impose a tax on the guarantee, it is imperative that C should be liable to pay a consideration to B. C would be liable to pay a consideration only if B was obligated to render the Guarantee service. But since B performs the guarantee on its own behest as a shareholder function, it cannot be said that C has induced the performance of the guarantee service. While one may say that the relationship between B and C has induced the act of guarantee, the mere existence of a relationship between B and C cannot be termed as a consideration in terms of 2(31) of the GST law.

The revenue places reliance on the Edelweiss Financial Services decision (refer to later para) to claim that the element of consideration which was absent in the service tax regime has been made good by virtue of Schedule I and hence the transaction is now taxable. However, this argument fails to appreciate that there is certainly a consideration in this contract in terms of section 126. Section 126 of the Contract Act identifies the consideration in the said contract of guarantee as being the financial assistance by A to C i.e. involving the issuance of the debt itself. B has been the recipient of the consideration in terms of the Contract Act in the form of the disbursement to C. In which case it would be incorrect to state that guarantee service has been rendered without consideration. No other consideration has been identified under the Contract law and hence one cannot impute a consideration between B and C merely to invoke Schedule I between the parties. The act of the revenue to invoke Schedule I on the premise that there is no consideration flowing to B is against the contract law provisions itself.

RECENT DEVELOPMENTS

An issue arose before the Supreme Court in the context of the negative list regime of service tax in the case of Edelweiss Financial Services7. The Court while affirming the decision of the Mumbai tribunal held that “consideration” is an inevitable requirement of taxation and the absence of such consideration to compensate for the corporate guarantee activity, rendered the transaction as non-taxable. Amidst this uproar, 51st GST Council took cognizance and recommended legislation of a deemed valuation rule in the form of Rule 28(2) w.e.f. 26th October, 2023:

“(2) Notwithstanding anything contained in sub-rule (1), the value of supply of services by a supplier to a recipient who is a related person, BY WAY of providing corporate guarantee to any banking company or financial institution ON BEHALF of the said recipient, shall be deemed to be one per cent of the amount of such guarantee offered, or the actual consideration, whichever is higher.”

Parallelly, CBIC’s Circular8 clarifies the issue from a valuation perspective:

Issue of corporate guarantees by Corporates to related entities In view of Schedule I and section 15, the activity of providing “guarantee by the parent entity to the Bank / FIs” is treated as a “service by the parent entity to the related entity”. Valuation is to be performed in terms of Rule 28. W.e.f. 26th October, 2023 – rule 28(2) deems the value of such service at 1 per cent of the amount guaranteed
Issue of personal guarantees by Directors to related entities While the issuance of personal guarantees is a deemed service in terms of Schedule I, in view of RBI’s circular9 which bars charging any commission or fee for such activity, it was clarified that there cannot be an open market value for such activity and hence the said activity is not taxable. It is surprising that the circular reaches the conclusion of non-taxability without testing other valuation alternatives and Rule 31 (residual method). 
7. [2023] 149 taxmann.com 76 (SC) affirming (2023) 5 Centax 57 (Tri.-Bom)
8. Circular No. 204/16/2023-GST dated 27th October, 2023
9. Para 2.2.9 (C) of RBI's Circular No. RBI/2021-22/121, dated 9th November, 2021

The GST council has curiously introduced Rule 28(2) for the valuation of Corporate / Personal Guarantees, by-passing the examination of taxability itself. The GST council has presumed that there is a guarantee service activity which flows from the Surety (B) to the Debtor (C) in all cases. This is evident from the literal wordings of Rule 28(2) which identifies the supply as being ‘by way of’ providing a corporate guarantee service to a Company / FI ‘on behalf of’ a recipient.

Rule 28(2) and circular seem to be creating a dichotomy by attempting to identify the service as a ‘guarantee service’ and also deeming it to be rendered to the Debtor. This clearly does not align well with the contractual structure prescribed in the Contract Act. Neither the definition of recipient nor section 7(1)(c) r.w. Schedule I, permits the rules to deem the ‘guarantee service’ as flowing from the Surety to the Debtor.

One may only probably view the rule to be applicable where an enforceable contract is agreed between B and C, wherein B takes on an obligation to issue a guarantee to A. The obligation under the contract would merely be an ‘agreement to issue a corporate guarantee to the Bank’ but would not be the act of guarantee itself. One may call it a financial support activity or by any other nomenclature but in substance such obligation cannot be the guarantee obligation as understood in terms of section 125 of the Contract Act.

Taking this perspective forward, Rule 28 would now attempt to value the support activity between related persons. Pre-amendment, in the absence of any consideration being charged, the said rule would rely upon the ‘open market value’ or the ‘value of like services’ or the ‘cost approach’. The first proviso to the said rule also provided flexibility to adopt a nominal fee as low as even “Zero” if the recipient was eligible to avail input tax credit. In view of this subjectivity, the manner of valuation of the open market value varied across various jurisdictions—while some adopted the SBI / Bank rate for guarantee commissions, others adopted ad-hoc rates leaving it to the taxpayer to defend with a better alternative. The amendment has now swept away the flexibility. It pegs the rate at 1 per cent of the amount of guarantee or the actual consideration, whichever being higher10.

10. The practice of fixing such ad-hoc rates through valuation rules is a separate debate.

Assuming the rule is valid, the intriguing question is whether the amended rule in its zeal to value the support activity misdirected itself in going after a non-taxable guarantee activity. Special importance should be placed on the phrase ‘by way of providing corporate guarantee’ and ‘on behalf of the recipient’ in the said Rule. Since the presence of a guarantee is already negated, the ad-hoc valuation rules introduced do not seem to be valuing the support function between B and C. Though support function may ultimately lead into a guarantee provided to the Bank / FI but the mere agreement to do so (between B and C) is not guarantee service per se. Hence one can clearly claim that in such a fact pattern, Rule 28(2) does not have applicability, and one may have to fall back upon the default option as available pre-amendment i.e. open market value, etc., As a consequence, the flexibility of 1st proviso granting the leverage to adopt any value (subject to full input tax credit at the recipient’s end) would now become available. Propagators of this rule may contend that this interpretation would make the rule itself redundant and inapplicable in all cases. Probably the rule would have limited applicability within Banking sectors where Bank / FIs act as co-guarantors in large arrangements. However, redundancy (if any) cannot result in forceful application of the provisions to a non-existent contract.

B) Cases where a consideration is charged or a contract is entered

No doubt the scenario changes completely if B and C enter into a specific contract wherein B is obligated to issue a corporate guarantee in consideration for a commission. This would be an enforceable contract wherein B would be receiving consideration in exchange for the promise of guarantee by B to A. In such case, the guarantee service has been induced by virtue of the contractual obligation and against a consideration flowing from C to B. Section 2(31) r.w. 2(93) clearly spells out that where a specific consideration is charged, the person liable to pay consideration would be termed as a ‘recipient’ of service. In view of the specific provision to treat C as the recipient of service and an identifiable flow of consideration inducing the guarantee, tax may possibly be invoked in such cases.

In summary, the legislation has not permitted imputation of any contract of guarantee de hors the contract law legislation. Thus, any assumption of a guarantee service by Surety to the Debtor is unwarranted. The service, if any, between the related entities may be a support function if the Surety takes it as part of a contractual obligation (such as under a shareholder agreement, etc.,). In case a consideration is charged by the Surety to the Debtor, such consideration is not towards the guarantee service, but rather a support function and is liable to be taxed accordingly. Though the law is settled under the service tax regime, the unfolding of the true picture under the GST setting would certainly be an interesting journey.

RECENT DECISIONS PART B : VAT

Jyothy Laboratories Limited vs. State of Bihar
and Others, (2019) 60GSTR 71 (Patna High
Court) – Judgment dated 17th July, 2018
Correction in the C Form.

FACTS
The Department had issued incorrect Form C. the Petitioner
had written several letters to the authorities, however
no action was taken to issue correct C Form. Finally, the assesse approached the High Court under Article, 226 of the
Constitution of the India.

HELD
The Hon’ble High Court directed the Commissioner of
Commercial Taxes to either himself take up the issue and
decide the question of correction in the Form C as prayed for
or should assign the matter to any other Statutory Authority
constituted for that purpose. The action was directed to be
taken within Three Weeks from the date of appearance of the Petitioner. It was also directed that in case, the corrected
form C could not be issued to the Petitioner, it would be
incumbent upon the authority to hear the Petitioner, consider
the submissions and pass a speaking order indicating
reasons to the Petitioner as to why his grievance could not
be remedied.

V.V. Shameer vs. State of Kerala(2019) 60 GSTR
73 (Ker)– Judgment dated 3rd July, 2018
Whether a claim can be granted when the Credit
Notes were not issued in the prescribed form?

FACTS
The Petitioner had received incentives from the
manufacturer. Those incentives were received at a later
stage. The Petitioner had shown such incentives in the books
of accounts, however, had not shown them in the returns,
neither had filed revised returns. The Petitioner had claimed
Input Tax Credit without considering the incentives received
by him. During assessment the Petitioner contended that
the manufacturer had paid full tax and had not considered
the incentives given by him to the buyers. Further, Petitioner
had also issued Credit Notes to the manufacturer. However,
the assessing authority disallowed the Input Tax Credit.

HELD
It was held that the Credit Notes as relied on by the Petitioner
were not in the prescribed form. Those did not contain the
details that would be necessary for allowing the claim of
credit to the dealer by the manufacturer. Though the amounts
were disclosed in the book of account and discrepancy was
noticed in the Audit Statement the Petitioner did not attempt to file revised return. Thus, the Credit Notes having not been
issued in the prescribed form the disallowance of Input Tax
Credit having been granted with respect to the incentives
was confirmed by the Court.
Commissioner, Commercial Tax, Uttarakhand
vs. Jai Durge (2019) 60 GSTR 82(Uttarakhand)–
Judgment dated 10th April, 2018
Whether the filing of prescribed form in the case
under consideration was mandatory?

FACTS
The assessee was the Job Worker. He had manufactured
tiles for the Government Department and supplied the
same to them. The Tribunal had given the findings that all
materials were supplied by the Government Department to
the assessee and that what was supplied by the assessee
was actually the labour component. The materials were
made use of by the assessee, who had supplied the labour
to make the tiles to be supplied. The Revenue contended
before the High Court that the assessee had not filed Form
No. IIID which was prescribed for that purpose.

HELD
The Court Noticed that the findings of the Tribunal were not
challenged by the Revenue. The Court also noticed that for
the earlier year the Tribunal as well as the High Court had
decided the same issue in favour of the appellant and had
held that the appellant was doing only a job work. The Court
therefore, held that the submission of Form IIID was not fatal
to the case of the assessee and confirmed the order of the
Tribunal.

RECENT DECISIONS PART B: VAT

The Addi. Commissioner of Sales Tax vs.
Benchmark Engineering Pvt Ltd.(Bom H.C) –
Judgment dated 28th November, 2018
Whether VAT can be levied on Service Tax,
Separately collected, even when the VAT is paid
under Composition Scheme?

FACTS

The appeal related to the period 2005-2006. The substantial
question of law referred to the Hon’ble High Court was
whether the Tribunal was justified in holding that for
determining the Composition amount in lieu of amount of
tax payable in respect of Works Contract Sales, the amount
of Service Tax charged separately in the invoice will not be
included in total contract value?

HELD

The Hon’ble Court upheld the judgment of the Tribunal
which had observed that the amount of Service Tax charged
separately in the invoice will not be included in total contract
value for the purpose of levy of VAT. The Hon’ble Court
referred to Trade Circular No.6T dated 14.05.2015 issued
by the Commissioner of Sales Tax, Maharashtra State which
had informed the trade that the Government had accepted
the judgment of the Tribunal in the case of Sujata Painters
wherein it was held that the Service Tax could not formed
part of Sale Price u/s.2(25) of the MVAT Act, in a transaction
wherein the sale price is determined subject to Rule 58 of
the MVAT Rules and is not liable to VAT. The Court said,
once the State had accepted the decision of the Tribunal in
the case of Sujata Painters by issuing Trade Circular and
pointing out that so far as the period prior to 01.04.2015 was
concerned, the Department had accepted the order of the
Tribunal that Service Tax would not form part of the Sale price
and informed the trade, the same would bar the Revenue
from taking a contrary view. The Court further said that the
State has to apply law uniformly to all the assesses. The
AGP had drawn the attention of the Court to the appeal on
similar issue, involved in the case of Technocrat Engineers,
and submitted that the same had already been admitted by
the Hon’ble Court. However, the Court refused to accept his
submissions stating that aforesaid Circular No.16 of 2015
was not pointed out to the Court at the time of admission of
that appeal.

Deepak Fertilisers And Petrochemicals
Corporation Ltd. vs. State of Maharashtra and
Others (Bom H.C.) – Judgment dated
26th June, 2018
Whether the Trade Circulars issued by the
Commissioner of Sales Tax, Maharashtra State can
controll the substantive notifications?

FACTS

The Petitioner was engaged in the manufacture and sale of
fertilisers and for the purpose of manufacture of fertilisers,
purchased natural gas from GAIL. The natural gas was
either utilised as fuel or as an input in the manufacture
and processing of fertilisers and chemicals. The rate of tax
applicable to the natural gas prior to 30th June 2017 was
13.5% under the MVAT Act,2002. However, Input Tax Credit
was available under that Act above 3%. Thus, the effective
rate on natural gas under that Act, was 3%. The Goods and
Service Tax was introduced on 1st July 2017. The natural
gas along with some other few goods was left outside the
coverage of the GST Act and VAT and CST continued to be
levied on the same. With effect from 1st July 2017, when any
person purchased natural gas domestically, the seller would
collect full tax from him @ 13.5% and since the person was
no longer a dealer under the 2002 Act due to the section
16(6A), he could not claim setoff or refund of the input tax
collected from him. Furthermore, he would be liable to pay
goods and service tax on his outputs at the full rate since the
GST Act only provided for ITC of goods and Service Tax paid
and not of value added tax paid. Hence, the effective rate
after 1st July 2017 got increased to 13.5%. The Government
of Maharashtra in exercise of its powers conferred u/s. 9(1)
of the MVAT Act issued a Notification dated 24th August
2017 adding Entry 16 in Schedule “B” to the MVAT Act, by
which the sale of natural gas to a registered dealer, subject
to the condition mentioned in the notification, was eligible
for a lower rate of VAT @ 3%. To avail the benefit of the
reduced rate of 3%, the purchasing dealer was required to
be certified by the Joint Commissioner. Queries were raised
to the Commissioner of Sales Tax whether the benefits
given under the Notification dated 24th August, 2017 were
available to the tax payers registered under the GST Act.
The Commissioner issued trade Circular No.39T dated 8th
September 2017 clarifying that the benefits of notifications dated 24th August 2017 would also be available to taxable
persons registered under the GST Act. Subsequently, by
Notification dated October 13, 2017, an explanation to
entry 16 of Schedule “B” of the MVAT Act was amended
with effect from 14th October 2017 to the effect that the
benefit of the Entry 16 in Schedule “B” shall be available to
a registered taxable person under the GST Act. However,
by Trade Circular No.3T of 2018 dated 16th January 2018 it
was clarified that manufacturers – buyers who did not hold
registration certificate under the MVAT Act on or after 1st
July 2017 either due to cancellation of registration certificate
or due to the deeming provision relating to cancellation of
registration certificate u/s. 16(6A) of the MVAT Act, shall
not be entitled for the benefits of the reduced rate of 3% in
respect of use of natural gas in manufacturing, for the period
24th August 2017 to 13th October 2017. Writ Petitions were
filed contending that Notification dated 13th October 2017
should be given effect to and operated from 24th August 2017
because Trade Circular No.3T of 2018 dated 16th October
2018 and the addenda dated 13th January 2018 enabled
recovery of VAT in excess of 3%.

HELD
Writ Petitions were dismissed holding that the language of
the Notifications issued was clear. The circulars were for
internal guidance or clarification of queries of the trade and
officials, but their language could not control the substantive
notifications.

 

Vishat Diagnostic Pvt Ltd. vs. State of
Maharashtra and Others (VAT Appeal Nos. 425
and 567 of 2017 (MSTT) – Judgment dated
30th November, 2018
Whether the words ‘on the body’ appearing in the
Entry for “Drug’ in the MVAT Act, 2002 exclude the

diagnostic kits used in the laboratory for testing of
blood etc., from the coverage of that entry and sent
the same to the residuary entry?

FACTS
The appellant was dealing in diagnostic reagents which were
used in laboratories in the diagnosis of the diseases like
diabetes, cancer etc.. The Advance Ruling Authority (ARA)
had relied upon the words ‘on the body’ appearing in Entry
No. C-29 (a) which was for drugs and held that the same
were falling under the residuary entry liable to tax @12.5%. It
was the contention of ARA that the words ‘on the body’ were
inserted in the said entry consequent to the judgment of the
Hon’ble Bombay High Court in the case of Merind Ltd. The
introduction of the said words in the Entry under the MVAT
Act was conscious. The legislature intended to exclude such
products which are used outside the human body i.e. in the
laboratory.

HELD
Hon’ble Maharashtra Sales Tax Tribunal relied on the
several judgments of the Apex Court, more particularly,
on the judgment in the case of Rajendra Prasad Yadav
and Others vs. State of M.P. and others (1997) 6 SCC
678 dated 09/07/1997 were in it was held that it is settled
principal of interpretation that all the provisions should be
harmoniously interpreted to give effect to all the provisions
and no part thereof rendered surplusage or otiose. Thus,
the words ‘diagnosis’ and ‘on the body’ were harmoniously
construed by the Hon’ble Tribunal. The Tribunal also relied
on the certificates issued by the competent authorities which
averred that there is no such product which can be used for
the purpose of diagnosis on the body of a person as held by
the ARA. The Hon’ble Tribunal gave liberal meaning to the
words ‘on the body’ and held that the diagnostic kits sold by
the appellant were covered by the entry for Drugs attracting
tax @5% and not 12.5%.

Service Tax

I. SUPREME COURT

Commissioner of CGST, CST, Delhi East vs. Haldiram Marketing Pvt. Ltd.

2023 (11) Centax 23 (S.C.)

Date of Order: 25th September, 2023

Service tax cannot be levied on the sale of packaged food over the counter as there was no service element and merely the sale of goods.

Service tax is not leviable on rent received from associate enterprises for the joint sale of goods; it merely amounts to sharing of rental expenses and not sub-letting of property.

FACTS

Respondent was engaged in the operation of food outlets of packaged foods on a take-away basis. An audit was conducted wherein it was observed that the assessee failed to pay service tax on the sale of take-away food items and on the share of rent received from the associate enterprise. Further, a SCN was issued proposing a service tax demand of Rs.23,09,45,317 with interest and penalty. Respondent submitted a reply to SCN for dropping the entire demand and explained that service tax was not required to be paid on the activities. However, the department issued an order demanding Rs.20,12,46,762 with interest and penalty and a demand of Rs.2,96,98,555 was dropped on account of cum duty benefit. Being aggrieved, an appeal was filed before CESTAT on the grounds that the supply of packaged food on a take-away basis was solely a sale transaction and hence service tax should not be levied. Respondent further stated that service tax could not be levied on the amount received from associate enterprises as it was towards space sharing. Thereafter, the entire service tax demand with interest and penalty was dropped by CESTAT. Being aggrieved by such dropping of demand by the Tribunal, the department filed an appeal before Hon’ble Supreme Court.

HELD

The order passed by CESTAT was affirmed by Hon’ble Supreme Court relying inter alia on the judgements of the Hon’ble Madras High Court in the case of Anjappar Chettinad A/C Restaurant, M/s RSM Foods (P) Ltd wherein it was held that there was no element of service in preparation of food, packaging and then selling the same over the counter as take-away item without any dining facility. Such activity in essence is the sale of goods and hence service tax is not leviable thereon. Further, rent received from associate enterprises for selling goods along with their own goods was only a sharing of rental expenses and did not amount to sub-letting. Hence, service tax was not leviable under renting of immovable property service. Consequently, the department’s appeal was dismissed.

Goods and Services Tax

I. HIGH COURT

62 Goparaj Gopalakrishnan Pillai vs. State Tax Officer-I

2023 (11) Centax 203 (Ker.)

Date of Order: 5th October, 2023

ITC cannot be denied to the recipient merely on the basis that the supplier has not remitted GST to the Government and supplies are not reflected in Form GSTR-2A without examining the documentary evidence.

FACTS

Petitioner, a registered dealer, was issued a SCN alleging that the petitioner had availed and utilized excess ITC of Rs. 33,05,038 in F.Y. 2017–18 based on the difference between GSTR-3B and GSTR-2A. Petitioner in its response stated that it had mistakenly entered an excess amount due to clerical error in GSTR-3B of December, 2017 but the said amount has not been utilized. The said excess ITC was adjusted in GSTR-3B of August, 2018. Respondent passed an order denying ITC of Rs.19,830 as excess claim because the supplier had neither remitted the GST collected to the department nor had uploaded details in GSTR-1 and hence said tax amount wasnot reflected in GSTR-2A. Being aggrieved by such denial, the petitioner filed a writ before the Hon’ble High Court.

HELD

High Court relying on its own judgment in the case of Diya Agencies vs. State Tax Officer WPC No. 29769 of 2023 dated 12th September, 2023, held that ITC not reflected in GSTR-2A cannot be the sole ground for rejecting ITC claims without giving opportunity to petitioner for providing evidence. The impugned order was set aside andthe matter was remanded back to the Respondent forpassing a reasoned order after considering the said documents.

63 Oaknorth (India) Pvt. Ltd. vs. Union of India

2023(76) GSTL 64 (P&H.)

Date of Order: 29th March, 2023

Appeal cannot be rejected merely on the ground that a certified copy of the impugned order was not submitted especially when the said order was available on the portal.

FACTS

An appeal was filed by the petitioner against an order dated 21st September, 2021. The same was rejected on the grounds that appeal was not accompanied by a certified copy of the impugned order as prescribed under section 107 of the HGST Act, 2017 and Rule 108 of the HGST Rules, 2017. Being aggrieved by such rejection of the appeal, the petitioner filed this writ before the Hon’ble High Court.

HELD

It was held that the appeal filed could not be dismissed solely on the ground that the petitioner had not submitted certified copies of the impugned order where such an order was already uploaded on the Government portal. The order was set aside and the matter was remanded back to the authority to pass a fresh order after considering its merits.

64 Nahar Industrial Enterprises Ltd vs. UOI

[2023] 156 taxmann.com 95 (Rajasthan)

Date of Order: 31st October, 2023

The statutory scheme of inverted rated duty structure is also applicable to cases where there are multiple outputs against multiple inputs and even if the overall rate of all inputs is marginally higher than the rate of output supplies, the accumulation of unutilized input tax credit on suchaccount will bring it within the net of inverted duty structure.

FACTS

The petitioner company is engaged in manufacturing of textiles which include spinning, weaving and processing. In the process of manufacturing, the petitioner uses various raw materials on which GST rates vary from 5 per cent to 28 per cent. The rate of GST on outputs ranges from 0.1 per cent to 12 per cent. The petitioner filed a refund claim under section 54(3) of the CGST Act for the period January, 2020 to March, 2020 on the ground that since the rates of GST on inputs were higher than the rates of GST on outputs, it is eligible for refund of accumulated tax on inverted rated duty structure basis. The department rejected the refund claim contending that the petitioner’s claim does not fall under the inverted rated duty structure as the rate of tax of inputs was found to be more or less 5 per cent, 12 per cent and 18 per cent whereas the tax rate on output supply was also 5 per cent, 12 per cent and 18 per cent. ITC availed on the inputs procured at the rate of 28 per cent GST was very negligible. It was also observed that the output sales was to the extent of 80 per cent of goods having 5 per cent duty only and the majority of inputs too had the rateof 5 per cent. It was held that the refund is mainlydue to high input purchases and they are in stockduring the claim period. The contention of the department therefore was that section 54(3) of the CGST Act,2017 is not attracted as there is no accumulation on account of input tax rates being higher than the output supply tax rates but due to other factors. The First Appellate Authority also decided the matter against the petitioner.

HELD

The Hon’ble Court analysed the input and output GST rates and observed that all the inputs are taken together and utilised through the process of manufacturing, the output supplies would carry a higher rate of GST as compared to the rate of GST on such inputs, either taken individually or collectively. The rate of tax on output ranges from 0.1 per cent to 5 per cent or 12 per cent whereas the rate of tax applicable to some inputs may be 5 per cent or 12 per cent, but on remaining inputs, the rate of GST is certainly higher than 5 per cent or 12 per cent. The Court observed that 100 per cent cotton goods are only 50 per cent of the total goods and the rest are cotton-dominated blends for which other inputs have rates of 18 per cent whereas the output rate is 5 per cent. Balance outputs are synthetic-dominated blends and 100 per cent polyester / viscose for which inputs bear rates of 12 per cent, 18 per cent and 28 per cent. This factual position was not denied by the department.

Hon’ble Court held that the language contained in proviso (ii) to section 54(3) of the CGST Act, 2017, uses the expression, “where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies” signifying the plurality of both inputs and output supplies. The Court thus held that the scheme of refund in case of inverted duty structure will continue to apply irrespective of the number of inputs and number of output supplies. It further held that in a case where there is an accumulation of unutilized ITC as a direct result of the rate of tax on inputs exceeding the rate of tax on output supplies, the scheme of refund as embodied in section 54(3) of the CGST Act, 2017 gets attracted. In other words, even if the overall rate of all inputs is marginally higher than the rate of output supplies, the accumulation of unutilized input tax credit on such an account will bring it within the net of the inverted duty structure.

The Hon’ble Court also referred to the decision of the Hon’ble Supreme Court in the case of Union of India & Others vs. VKC Footsteps India Private Limited[2021] 130 taxmann.comin which the Hon’ble Apex Court had noted that it was only those cases of ITC accumulation which are on account of inverted duty structure i.e., GST on output supplies being less than the GST on inputs that the scheme of refund would be applicable. Accumulation of unutilized input tax credit for other reasons like stock accumulation, capital goods and partial reverse charge mechanism for certain services may not attract the refund mechanism. As regards the department’s contention that the accumulation of ITC was on account of the higher stock, the Court held that refund formulae as contained in Rule 89(5) of the CGST Rules, 2017 do not contain any adjustment in respect of the stock as it envisages that total ITC claimed on inputs during the claim period gets consumed in respect of the turnover of the claim period. Thus, the determining factor for applicability of section 54(3) of the CGST Act, 2017 read with Rule 89(5) of the CGST Rules, 2017 is the rate of tax and quantum of ITC content and not the value / quantum of individual inputs (going into an output) and the outputs. The stock-based approach, therefore, violates the statutory scheme of refund.

65 Association of Technical Textiles Manufacturers and Processors vs. UOI

[2023] 156 taxmann.com 421 (Delhi)

Date of Order: 16th November, 2023

Power to issue orders, instructions or directions to Central Tax Officers stands vested exclusively in the Central Board of Indirect Taxes and Customs and not in the Tax Research Unit.

FACTS

The petitioners challenged the TRU Circular dated 31st December, 2018 to the extent that it purports to clarify that polypropylene woven and non-woven bags including those laminated with Biaxially Oriented Polypropylene2 are liable to be classified as falling under Chapter 39 and more particularly Tariff Heading 3923 forming part of the First Schedule to the Customs Tariff Act, 1975. The dispute essentially related to a question of the classification of polypropylene woven and non-woven bags under the Harmonized System of Nomenclature. The petitioners contended that the power to issue orders, instructions or directions to Central Tax Officers stands vested exclusively in the Central Board of Indirect Taxes and Customs and not on the TRU.

HELD

In the absence of any provision brought to the Court’s attention in terms of which the TRU could be said to have been clothed with the authority or jurisdiction to render a clarification with respect to the classification of goods and articles, the Hon’ble Court held that power to issue instructions and directions to Central Tax Officers vests exclusively with the Board (i.e., CBIC). TRU had no authority to issue clarification through the said Circular. The Court also observed that divergent views taken on the subject matter of dispute by various Advance Ruling Authorities and Appellant Advance Ruling Authorities of different States, cannot be rendered a quietus by the issuance of a directive or clarification of the nature issued by the said Circular. The Court also observed that the said impugned Circular fails to consider various aspects and hence it cannot be upheld.

66 Delhi Metro Rail Corporation Ltd vs. Additional Commissioner, Central Goods and Services Tax Appeals II

[2023] 154 taxmann.com 567 (Delhi)

Date of Order: 18th September, 2023

The limitation period of a two-year limit for applying a GST refund does not apply when GST is not chargeable to that transaction and tax has been paid under a mistake of law.

FACTS

The appellant (DMRC) provided services to Surat Municipal Corporation for preparing a project report for Metro Rail of an invoice value of Rs.19,04,520. Such services were not taxable under a notification 12/2017. Surat Municipal Corporation paid Rs.16,14,000 only to DMRC i.e., excluding GST tax amount. However, to comply with GST provisions, DMRC deposited the said GST amount in August 2017. Subsequently, DMRC found that tax was deposited by DMRC under a mistake of law. The refund application filed by DMRC was rejected as it was filed after the expiry of two years from the relevant date. The dispute regarding the rejection of the refund was challenged before the Hon’ble Court.

HELD

The Hon’ble Court held that Article 265 of the Constitution of India prescribes any levy or collection of tax only by authority of law. The Court observed that the GST was not payable by the DMRC. Thus, the amount of tax deposited by the DMRC on an erroneous belief that payment for services rendered by it was chargeable to tax, cannot be retained by the respondents. The Court also noted that the service recipient did not pay tax to DMRC. The Court thus held that the period of limitation for applying for the refund as prescribed under section 54 of the CGST Act, would not apply where GST is not chargeable and it is established that an amount has been deposited under a mistake of law. The Hon’ble Court also referred to the decisions of the State of Madhya Pradesh &Anr. vs. Bhailal Bhai: AIR 1964 SC 1006 and M/s. Cosmol Energy Private Limited vs. State of Gujarat: R / Special Civil Application No. 11905/2020, decided on 22nd December, 2020 and took note of the fact that the department has not filed any appeal against the said decision of the Gujarat High Court.

67 BST Steels (P.) Ltd. vs. Superintendent of Central Tax

[2023] 155 taxmann.com 143 (TELANGANA)

Date of Order: 27th September, 2023

The guarantee / security to the bank provided by the Managing Director by providing the personal properties as security and personal guarantee would attract GST under the Reverse Charge Mechanism.

FACTS AND HELD

The issue before the Court was whether there is no requirement to pay GST on the guarantee / security to the bank provided by the Managing Director by providing the personal properties as security and personal guarantee. The department referred to entry no. 6 of Notification No. 13/2017-Central Tax wherein the services supplied by a director of a company or a body corporate to the said company or the body corporate would attract GST under the Reverse Charge Mechanism. The appellant contended that the personal properties provided by the Managing Director as security and personal guarantee provided for the company are not liable to GST.Relying upon the said Notification the Court held that the petitioner has not made a strong case and hence the interference with the orders is not warranted.

Note: The Readers may note that in the 52nd GST Council Meeting, the GST Council was directed to issue a circular clarifying that when no consideration is paid by the company to the director in any form, directly or indirectly, for providing a personal guarantee to the bank / financial institutes on their behalf, the open market value of the said transaction / supply may be treated as zero and hence, no tax is payable in respect of such supply of services. Further, the factual position as to whether the director was an employee of the company or not does not appear to have been discussed in this matter. In this regard, readers may go through Circular No. 140/10/2020-GST, dated 10th June, 2020.

68 Deepa Traders vs. Principal Chief Commissioner of GST and Central Excise, Chennai

2023 (73) GSTL 176 (Mad.)

Date of Order: 9th March, 2023

Amendment of GSTR-1 and GSTR 3B is permissible, when inadvertent and bonafide human errors were committed and a mechanism to rectify the same was absent.

FACTS

Petitioner, a registered scrap dealer under the GST law committed inadvertent errors in mentioning recipient’s GSTIN / name, invoice number / date and also failed to report invoices-wise details in Form GSTR 1. However, the same was correctly reflected in GSTR-3 and GST liability was discharged. Moreover, IGST was inadvertently remitted under the heads of CGST and SGST. Since Form GSTR-2 or GSTR-1A were not notified, the errors remained unnoticed. On being intimidated by such mistakes from customers, the petitioner was unable to rectify its returns in the absence of any mechanism for it. As a result, the petitioner preferred a writ petition seeking permission for rectification of GSTR-1 before the Hon’ble High Court.

HELD

High Court held that since Forms GSTR-1A and GSTR-2 did not come into existence, the petitioner should not be mulcted with any liability on account of bonafide human error. Accordingly, the petitioner was permitted to re-submit the annexures to Form GSTR-3B with the correct distribution of credit between IGST, CGST and SGST as well as amended GSTR 1 to rectify the bonafide errors. Therefore, the writ petition was allowed in favour of the petitioner.

69 Ktex Non-woven Pvt. Ltd. vs. Union of India

2023 (11) Centax 12 (Guj.)

Date of Order: 14th September, 2023

Benefit of Notification No. 79/2017 — Custom dated 13th October, 2017 granting exemption to import of capital goods from payment of IGST was clarificatory in nature and extended to Capital Goods imported under EPCG scheme between 1st July, 2017 and 13th October, 2017.

FACTS

Petitioner was engaged in the business of fabrics and had imported capital goods under the EPCG scheme. Petitioner applied for exemption on import of capital goods from customs duty and additional duty leviable thereon. After the introduction of GST law on 1st July, 2017, any goods imported would be subject to integrated tax and compensation cess. However, Ministry of Finance vide Notification No. 79/2017 — Customs dated 13th October, 2017, exempted the payment of IGST for the goods imported under the EPCG scheme. Respondent contended that the said notification was issued on  13th October, 2017 and goods were imported between 1st July, 2017 and 13th October, 2017, and hence the petitioner was not eligible to claim exemption and was liable to pay IGST. Thus, the petitioner was compelled to pay the amount of IGST and subsequently sought a refund for the amount of IGST paid. However, the same was rejected by the respondent. Being aggrieved by denial of exemption, the petitioner filed this writ petition before the Hon’ble High Court.

HELD

Relying upon the decision of the jurisdictional High Court in M/s. Prince Spintex Pvt. Ltd. vs. UOI [2020 (35) G.S.T.L. 261 (Guj.)], Hon. High Court held that the objective of the EPCG scheme is to facilitate the import of capital goods to export qualitative goods. The said scheme was not an unconditional exemption. It was an incentive scheme which allowed imports at zero customs duty subject to the fulfilment of export obligations. The intention of the Government was always to exempt the payment of additional duties to the goods imported under the EPCG scheme. Hence, Notification No. 79/2017 — Customs dated 13th October, 2017 must be read as clarificatory in nature as applicable to goods imported between 1st July, 2017 and 13th October, 2017 as per the intention of the legislature. Consequently, the Court directed the respondent to refund the amount of IGST to the petitioner.

70 Jem Exporter vs. Union of India

2023(76) GSTL (Bom.)

Date of Order: 2nd August, 2023

An appeal filed against the cancellation of a registration order cannot be rejected merely due to procedural defects without providing an opportunity for rectifying the same.

FACTS

Petitioner filed an application for a refund of ITC on the export of goods. A common Show Cause Notice was issued to the petitioner and IJM Exporters alleging that ITC was availed by IJM Exporters on goods purchased from non-existing entities which was passed on to the petitioner. Thus, it was alleged that ITC was wrongly availed by the petitioner. Petitioner’s response justifying the refund claim was rejected and an order confirming the demand with interest and penalty was passed. Further, the appeal filed by the petitioner was rejected by the Appellate Authority on the grounds that no proof of pre-deposit payment was provided, a certified copy of the Order-in-Original was not filed and the appeal compilation was not signed. Being aggrieved by such rejection, a writ petition was filed before the Hon’ble High Court.

HELD

It was held that the appeal cannot be rejected merely on the grounds of procedural non-compliance without issuing a defect memo and providing an opportunity to rectify the same. Accordingly, the Hon. Court set aside the impugned Order and restored the appeal directing the Commissioner (Appeals) to issue a Defect Memo and provide an opportunity for rectification of procedural defects.

Recent Developments in GST

  1. NOTIFICATIONS RELATING TO RATE OF TAX

1. The Government has issued various notifications, all dated 19th October, 2023, for amending certain entries in Schedules prescribing rate of tax. The short gist is as under:

Sr. Notification No. Indicative Change
(i) Notification No. 12/2023-Central Tax (Rate) To effect changes in notification no. 11/2017. The change is regarding conditions about eligibility of ITC in given circumstances.
(ii) Notification No. 13/2023-Central Tax (Rate) To effect changes in notification no. 12/2017 Central Tax (Rate) dated 28th June, 2017. The changes are mainly related to the tax rate for supply to the Government.
(iii) Notification No. 14/2023-Central Tax (Rate) To amend notification no. 13/2017 — Central tax (Rate) dated 28th June, 2017. The changes are relating to services supplied by Central Government / departments.
(iv) Notification No. 15/2023-Central Tax (Rate) To effect changes in notification no. 15/2017 Central Tax (Rate) dated 28th June, 2017. The changes are relating to builders and construction of complexes etc..
(v) Notification No. 16/2023-Central Tax (Rate) The changes are related to transport activity.
(vi) Notification No. 17/2023-Central Tax (Rate) The changes are effected in Notification no. 1/2017-Central Tax (Rate) dated 28th June, 2017. The changes are in relation to Molasses and Millet flour and Spirits for industrial uses etc.
(vii) Notification No. 18/2023-Central Tax (Rate) The consequential changes in rate of tax for millets are affected in Notification no. 2/2017-Central Tax (Rate) dated 28th June, 2017.
(viii) Notification No. 19/2023-Central Tax (Rate) The consequential changes are made in notification no. 4/2017-Central Tax (Rate) dated 28th June, 2017 due to changes in rate of tax for Central Government / Central Government departments.
(ix) Notification No. 20/2023-Central Tax (Rate) The changes are effected in Notification no. 5/2017-Central Tax (Rate) dated 28th June, 2017. The changes are about refund restriction.
All above notifications are to apply from 20th October, 2023.
  1. Notifications bearing no. 12/2023- Integrated Tax (Rate) dated 19th October, 2023 to No. 22/2023- Integrated Tax (Rate) dated 19th October, 2023 with similar effect as above, are issued under IGST Act. These will also be effective from 20th October, 2023.

B.    OTHER NOTIFICATIONS

(i) Notification No. 52/2023-Central Tax dated 26th October, 2023

By the above notification, GST Rules are amended. The changes are mainly to provide a valuation method for corporate guarantee and mandatory vacating of provisional attachment orders.

(ii) Notification No. 53/2023-Central Tax dated 2nd November, 2023

The Central Government has issued the above notification to provide a specific procedure for condonation of delay in filing appeals against demand orders (commonly called as Amnesty for filing appeals). The amnesty is under Specified situation and with Specified conditions.

(iii)Notification No. GST-793(E) dated 25th October, 2023

The Central Government has issued the above notification by which the Goods & Services Tax Appellate Tribunal (Appointment and Conditions of Services of President and Members) Rules, 2023 are published.

The Rules contain the procedure for appointment, the salary and other services conditions.

3. GSTN – News

The GSTN has informed through communication dated 12th October, 2023, the availability of the facility for the E-commerce operators through whom unregistered suppliers of goods can supply goods and also enrolment for supply of goods through E-commerce.

4. Circulars

The following circulars are issued by CBIC.

(i) Clarification above Export of services — Circular no. 202/04/2023-GST dated 27th October, 2023

By the above circular, clarifications are givenabout the export of services, particularly about
conditions in sub-clause (iv) of section 2(6) vis-à-vis RBI’s, AP (DIR Services) Circular no. 10 dated 11th July, 2022.

(ii) Place of supply — Circular no. 203/15/2023 dated 27th October, 2023

By the above circular, clarifications are given aboutthe place of supply under various situations like, transportation of goods, advertising sector, Co-location services etc.

(iii) Taxability of Corporate Guarantee — Circular no. 204/16/2023 dated 27th October, 2023

Vide above circular, the clarification about various aspects of the taxability of personal guarantee and corporate guarantee are given.

(iv) Rate of tax — Imitation Zari Thread — Circular no. 205/17/2023 dated 31st October, 2023

By the above circular, clarifications are given about GST Rate on Imitation Zari Thread or Yarn based thread as per recommendation of GST Council.

(v) Clarification above applicability of GST onCertain Services — Circular no. 206/18/2023 dated 31st October, 2023

By this circular, the applicability of tax on various services like passenger transport, reimbursement of electricity, job-work of Barley, Millets and services like horticulture/horticulture works is clarified.

C. ADVANCE RULINGS

42 Job work – Nature

Indian Oil Corporation Ltd.

(Order No. 01/ODISHA-AAAR/Appeal/2022-23 dated 21st June, 2022 (Odisha))

This is an appeal against AR order No. 03/ODISHA-AAR/2021-22 dated 15th December, 2021. The facts in brief are that M/s. Indian Oil Corporation Limited, Paradeep Refinery, is a public sector undertaking. The Appellant owns and operates 15 MMTPA oil refinery in the state of Odisha located at Paradeep and refines crude oil and produces several petroleum products at this location. The Appellant requires Hydrogen gas, Nitrogen gas and HP steam for its refining activity, collectively referred to as ‘Industrial Gases’. Industrial gases can be obtained from inputs such as Naphtha and other utilities such as Demineralised water (‘DM water’), power, cooling water, service water, instrument air etc.

Appellant has awarded a contract to M/s. Praxair India Private Limited (“Praxair”), for the Construction, Commissioning, and Leasing and thereafter for Operating and Maintaining a new Hydrogen & Nitrogen Plant within the IOCL refinery complex at Paradeep for supplying of industrial gas on Build-Own-Operate (BOO) basis to appellant. Under this agreement, all the inputs required for the Hydrogen plant and Nitrogen plant like naphtha, DM water, cooling water, service water, fire water, steam and power were to be supplied by the Appellant to M/s. Praxair India Private Limited, located in its Refinery Complex as above for manufacturing of industrial gases as final product. The final products are sent back to the Appellant by M/s. Praxair India Private Limited for the exclusive utilization in the refinery processes. All the output products produced after processing are transferred to the Appellant by Praxair through a pipeline. The ownership of the input and output products remains with the Appellant only.

In the above background, the Appellant had approached the AAR for getting an advance ruling on the following issues:

“(i)    Whether sending of inputs (Naphtha, DM water, Power, Cooling water, service water and instrument air) by the Appellant to M/s. Praxair India Private Limited and receiving back of industrial gases (Hydrogen gas, Nitrogen gas and HP steam) under the lease agreement will fall under ‘job work’ in terms of section 2(68) of Central Goods and Service Tax Act, 2017 (CGST Act) and Odisha Goods and Service Tax Act, 2017 (OGST Act)?

(ii)    Whether all the payments under the lease agreement will attract GST as applicable to Job Work.”

In view of the above background facts, the AAR gave a ruling that:

“i)    The activities being undertaken in the Appellant’s premises/production plant do not qualify for ‘Job work’ under section 2(68) of Central Goods and Service Tax Act, 2017 (CGST Act) and Odisha Goods and Service Tax Act, 2017 (OGST Act) and Section 143 of said Acts.

ii)    The Appellant’s next question “Whether all the payments under the contract will attract GST as applicable to Job work?” is not maintainable on the ground already stated supra.”

Appellant has filed an appeal against the above AR.

Before the AAAR appellant repeated that the agreement is to be read in whole and as per agreement, the substance is to render job work services.

The ld. AAAR noted the term in the agreement as under:

“the Lessor (M/s. Praxair India Private Limited) does hereby demise unto the Lesee (Appellant) by way of lease the production plant to hold the same unto the Lessee for a period of 15(fifteen) years from the effective date, paying therefore a monthly rent as hereinafter mentioned the Lessor acknowledges that vacant physical and peaceful possession of the production plant has been handed over to the Lessee on the effective date.”

The ld. AAAR therefore observed that the plant is not under the control and possession of M/s. Praxair India Private Limited but it is with Appellant on a monthly rent basis for 15 years.

Therefore, the AAAR held that the agreement between M/s. Praxair India Private Limited and the Appellant is a simple ‘lease agreement’ and not a ‘job work agreement’ and M/s. Praxair India Private Limited has no control and possession over the place where the inputs supplied by the Appellant are processed. The ld. AAAR also referred to other incidental terms.

The ld. AAAR held that the whole operation of Praxair is under the control of the appellant and hence the claim of the appellant that there is job work, service is rejected by ld. AAAR. Accordingly, the ld. AAAR confirmed AR and dismissed the appeal.

43 Construction Contract for Government entity – Pre and Post amendment
Shree Constructions (Order No. AR. Com/10/2022 dated 8th December, 2022 (Telangana)

The facts are that the applicant, M/s. Shree Constructions, are in the business of execution of works contracts wherein they execute the construction of the building on the land provided by the Telangana State Industrial Infrastructure Corporation Limited (TSIICL). The applicant is to construct warehouses and cold storage at the primary processing centre in Jillela Village of Rajanna Siricilla District. The applicant also informed that TSIICL will be letting out godowns for rent and it will be a business activity. The applicant further submitted that the TSIICL is wholly owned by the Government of Telangana and therefore the supply of works contract service by them is to a Government entity. The applicant therefore sought an advance ruling on the rate of tax applicable to supplies made to such Government entity.

The following question was raised:

“Q1. The rate applicable for the works contract service provided to the Telangana State Industrial Infrastructure Corporation Limited (TSIICL) which is wholly owned by the Government of Telangana State by way of construction of building on their land. Whether it is 12 per cent as the for Telangana State Industrial Infrastructure Corporation Limited (TSIICL) is wholly owned by the Government of Telangana or 18 per cent as the for Telangana State Industrial Infrastructure Corporation Limited is a business entity and collecting rent for letting our Godown/Building from its customers.”

The applicant reiterated its contention of a lower rate of 12 per cent.

The ld. AAR observed that TSIICL is a Government entity and apparently falls under S. No. 3(vi) of Notification No. 11/2017 which reads as follows:

“(vi) [Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, {other than that covered by items (i), (ia), (ib), (ic), (id), (ie) and (if) above provided to the Central Government, State Government, Union Territory, a local authority, a Governmental Authority or a Government Entity by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of —

(a) a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;

(b) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment; or

(d) a residential complex predominantly meant for self-use or the use of their employees or other persons specified in paragraph 3 of the Schedule III of the Central Goods and Services Tax Act, 2017.

Provided that where the services are supplied to a Government Entity, they should have been procured by the said entity in relation to a work entrusted to it by the Central Government, State Government, Union territory or local authority, as the case may be.

Explanation. — For the purposes of this item, the term business‘ shall not include any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities.”

The ld. AAR also referred to terms ‘Government Authority’ & ‘Government entity’ inserted as the definition in notification no. 31/2017-Central Tax (Rate) dated 13th October, 2017, in Notification no. 11/2017 as clauses (ix) & (x) to the explanation at Para 4 which is as follows:

“(ix) Governmental Authority means an authority or a board or any other body, – (i) Set up by an Act of Parliament or a State Legislature; or (ii) Established by any Government, with 90 percent. or more participation by way of equity or control, to carry out any function entrusted to a Municipality under article 243 W of the Constitution or to a Panchayat under article 243 G of the Constitution.

(x) Government Entity means an authority or a board or any other body including a society, trust, corporation, — (i) Set up by an Act of Parliament or State Legislature; or (ii) Established by any Government, with 90 per cent. or more participation by way of equity or control, to carry out a function entrusted by the Central Government, State Government, Union Territory or a local authority.”

The ld. AAR appreciated that the recipient is a Government entity. It further observed that the original notification No. 11/2017 applied a concessional rate of tax to ‘Government Entities’ & ‘Governmental Authorities’ @ 6 per cent of CGST & SGST each, only if such construction is predominantly for use other than for commerce, industry or any other business or profession. Since in the present case, the ware houses are for business purposes, the ld. AAR held that the above notification cannot apply to the applicant and hence further held that the applicable rate is 18 per cent. The ld. AAR also noted an amendment in the above entry in November 2021 vide Notification No. 15/2021 dated 18th November, 2021 whereby the phrases ‘Government Entity’ & ‘Governmental Authority’ are deleted from the Entry at S. No. 3(vi) of Notification No. 11/2017 with effect from 1st January, 2022. Thus, the works executed even for the ‘Governmental Entity’ or ‘Government Authority’ will be taxable @ 18 per cent from 1st January, 2022.

Accordingly, the ld. AAR confirmed rate @ 18 per cent for pre-amendment as well as post-amendment period.

A similar issue was also raised in one more AR bearing No. AR. Com/15/2022 dated 8th December, 2022 (Telangana). In this case also, the applicant was the same and has executed contracts for the same authority i.e., Telangana State Industrial Infrastructure Corporation Ltd. The applicant is to execute a contract for Bund beautification and construction of suspension wood bridge. The ld. AAR relying upon the above position of notification entry 3(vi) of Notification no. 11/2017 held the above contracts liable to tax @ 12 per cent.

There were further two contracts for establishing Shilparamam and Neera Café and food court. Since the above works are for business purposes, the ld. AAR held that tax applicable to said contracts will be 18 per cent. It was further held that from 1st January, 2022, the first category of contracts will also fall in the category of 18 per cent rate due to amendment in entry 3(vi) as discussed in earlier AR.

44 Exemption to Sub-contractor
Magnetic Infotech P. Ltd. (Order No. AAR. Com/11/2022 dated 22nd November, 2022 (Telangana)

The brief facts are that Magnetic Infotech Pvt Ltd, Plot No. 08, Krishna Nagar Colony, Kakaguda Village, Wellington Road, Picket, Secunderabad, Hyderabad, Telangana — 500009, had filed an application in FORM GST ARA-01 under Section 97(1) of TGST Act, 2017 read with Rule 104 of CGST/TGST Rules under following facts.

The Applicant has entered into agreements with various educational institutions located in different States such as the Board of Secondary Education and others.

The scope of work in respect of the services being provided to the educational institutions by the applicant was noted as falling in the following three categories:

i.    Data processing for conduct of examination

ii.    Results Preparation

iii.    Generation and printing of statistical data and reports in the prescribed proformas as required by the educational institutions.

The aforesaid three categories of services involved processing of examination results which involves collection of examination forms from students and processing, and generation of checklists which are sent to the corresponding education institutions for verification and error correction. Then the checklist corrections are updated to make it error-free data. The further work involved the generation of hall tickets / admit cards, and photo attendance sheets which are sent to the examination centres. There are further activities like Processing the nominal roll data, generation of OMR sheets for obtaining marks, and conducting the examinations with nominal roll data and student information.

Post-examination services include getting the marks awarded from the evaluation centers capturing the data and summarizing it, purifying it and incidental activities till the declaration of results and issuing the marks memos to the students.

The applicant has submitted the following questions for Advance ruling:

a. Whether GST exemption is available to the applicant in respect of the pre and post Examination services being provided to the Educational Boards and Universities (including Open Universities)?

b. If answer to Q. No.1 is affirmative, whether the exemption is available to the applicant in case the services are provided on sub-contract basis i.e. the applicant provides pre and post examination services to the main contractor who in turn provide the said services to the Educational Boards & Universities (including Open Universities)?

Thus, the main issue involved was service rendered by the applicant on sub-contractor basis to main contractor in relation to pre & post-examination services.

The AAR gave AR wherein the Members of the Authority expressed different opinions on the second question raised by the applicant. One of the members Sri S.V. Kasi Visweswara Rao, Additional Commissioner (State Tax) held as under:

“It was opined by the above Member that in view of provisions contained under Sl. No. 66(b) of the Notification No. 12/2017—Central Tax (Rate), dt.28- 06-2017, as amended, the service relating to admission to or conduct of examination is exempt when provided to such educational institution, therefore, where a service itself is exempt, this exemption can be claimed by any taxable person including a sub-contractor.”

The other member Shri B. Raghu Kiran, Additional Commissioner, Central Tax held as under:

“8.4. The service relating to admission to or conduct of examination is exempt when provided to such educational institution. The said entry specifies that the services are required to be supplied to educational institution. Nevertheless, where the privity of contract is between the applicant (as a sub-contractor) and a main contractor, in such cases, the main-contractor does not fall under the definition of ‘educational institution’ and therefore, such supply is not covered under entry 66(b) of Not. No. 12/2017-CT (R) dated 28-06-2017 as amended. As such, the benefit of exemption is not available to the sub-contractor who supplies service to main contractor even though service to ultimately rendered to education institution.”

Under the above facts of divergent views on Question 2 about the applicability of GST, the said question was referred to the Appellate Authority for Advance Ruling for the state of Telangana in terms of Section 98(5) of the CGST/TGST Act, 2017 for hearing and decision on the said question No. 2.

The ld. AAAR reproduced the relevant extract of Notification no. 12/2017-CT(R), dated 28th June, 2022 and reproduced the same as under:

“Sl. No. Chapter, Section or Heading Description of Services
(1) (2) (3)
66 Heading 9992 or Heading 9963 Services provided —

(a) by an education institution to its students, faculty and staff;

(aa) by an educational institution by way of conduct of entrance examination against consideration in the form of entrance fee;

(b) to an educational institution, by way of,-

(i) transportation of students, faculty and staff;

(ii) catering, including any mid-day meals scheme sponsored by the Central Government, State Government or Union territory;

(iii) security or cleaning or house-keeping services performed in such educational institution.

(iv) services relating to admission to, or conduct of examination by, such institution;

Provided that nothing contained in sub-items (i), (ii) and (iii) of item (b) shall apply to an educational institution other than an institution providing services by way of pre-school education and education up to higher secondary school or equivalent.”

The ld. AAAR observed that the exemption is available when services are provided to an educational institution, by way of Services relating to admission to, or conduct of examination by, such institution.

In other words, the ld. AAAR observed that theexemption would be available when the services are provided “to” an educational institution for services relating to admission to, or conduct of examination by, such institution.

The ld. AAAR held that since in the present case, the main contractor to whom the applicant is to provide services as sub-contractor is not an educational institution, though the services are allegedly being provided to the Educational Boards and Universities by the main contractor, the exemption contained in the impugned notification is not available to the applicant. The ld. AAAR held that the wordings of any notification have to be strictly read to allow or deny any exemption.

In view of the above, the ld. AAAR held that the applicant, M/s. Magnetic Infotech Private Ltd., as a sub-contractor, is not eligible to claim exemption as available under Notification no. 12/2017(R), dated 28th June, 2017.

Tax Implications on Assignment of Lease-Hold Rights

INTRODUCTION

Section 105 of the Transfer of Property Act, 1882 defines a lease of immoveable property as a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specific occasions to the transferor by the transferee, who accepts the transfer on such terms.

It has been a common practice for Governments and instrumentalities acting on behalf of Governments to allot parcels of lands on long-term leases. Such typically entail a one-time upfront premium (which fairly approximates the value of the land) and a periodic nominal rent (which also in many cases is compounded and collected upfront). The lease agreements executed between the lessor and the lessee may contain restrictive covenants in terms of use of the property, however, only subject to such restrictive covenants, the lessee is entitled to free use and enjoyment of the property in his own right. Further, such lease agreements permit a free transfer of the property by the lessee to third parties subject to approvals and payment of fees.

When service tax was introduced on ‘Renting of Immoveable Property Services’, the Department attempted to impose service tax on such Governments or instrumentalities and the same was widely challenged on various grounds. The matters are currently sub-judice and pending before the Courts.

The introduction of GST compounded the confusion due to a perceived wide interpretation of the term ‘service’ and limited applicability of exclusion under Schedule III of the CGST Act, 2017. A challenge against the collection of GST by an association of allottees was negated by the Bombay High Court in the case of Builders Association of Navi Mumbai vs. Union of India 2018 (12) GSTL 232 (Bom) and the appeal before the Supreme Court was also dismissed.

LEGISLATIVE DEVELOPMENTS

Considering the challenges of imposition of GST on the lease premium (which fairly approximates the value of land), Entry 41 of Notification 12/2017-CT(Rate) provided for an exemption from GST for one-time upfront amount (called as premium, salami, cost, price, development charges or by any other name) leviable in respect of the service, by way of granting long term (thirty years, or more) lease of industrial plots, provided by the State Government Industrial Development Corporations or Undertakings to industrial units. The said entry was amended from time to time.

Further, in cases where the land was further used for the development of real estate for further sale, Entry 41A inserted with effect from 1st April, 2019 provided for a partial exemption to the extent of sale of residential apartments prior to completion certificate and also prescribed a reverse charge mechanism making the promoter liable for payment of GST.

In view of the above entries, the transaction related to the allotment of plot of land by the Governments and instrumentalities to the allottees is by and large immune from GST except to the extent of proportionate reverse charge mechanism in the hands of the promoter. However, a new controversy is brewing in respect of secondary transactions i.e. the further assignment of lease by the original allottee to third parties.

SCENARIOS

Typically, an allotment of plot of land by the Government instrumentality to a promoter for real estate development would also entail a secondary transaction whereby the promoter would convey the rights in the leasehold land in favour of the proposed society of the apartment buyers. Such an allotment arises out of the covenants agreed upon in the agreement for sale entered into with individual buyers and does not bear a distinct discernible consideration. Entry 16(ii) of Notification 11/2017-CT(Rate) provides for a NIL Rate of tax for the supply of land or undivided share of land by way of lease or sub-lease where such supply is a part of composite supply of construction of units thereby resolving the issue for secondary transactions in case of real-estate development.

However, no explicit exemption entries prevail in case of secondary or subsequent transactions involving an assignment of lease in the underlying land.

In this article, we have discussed the GST implications which revolve around such subsequent transactions of assignment of such long-term leases. While the Supreme Court decision in the case of Builders Association (supra) has already held that GST is attracted on the lease premium, it may still be appropriate to examine the issue de novo due to various legislative developments, which may be useful to distinguish the said decision.

IS LAND, THE SUBJECT MATTER OF LEVY, “GOODS” OR “SERVICE” FOR THE PURPOSE OF GST?

Section 7 includes within the scope of supply all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.

A simple grammatical interpretation of the above would suggest that the coverage of a particular transaction under the scope of supply depends on two important parameters — (a) the form of supply — which is widely defined to include all forms of supplies such as sale, transfer, barter, exchange, license, rental, lease or disposal and (b) the subject matter of supply — which is specifically defined to include only ‘goods’ or ‘services’ or ‘both’.

It appears that the scope of coverage can be appreciated only if both the elements i.e. the form of supply and the subject matter of levy are independently analysed. An easy analogy to understand the de-coupled nature of the form and the subject matter of the supply is to examine the scenario of a motor car, which as a subject matter of supply would always constitute ‘goods’. However, depending on the form of supply, i.e. whether it is supplied by way of sale or by way of lease, the transaction would be treated either as supply of goods or supply of services.

Therefore, it first needs to be analysed whether land (as a subject matter of supply) can be considered as goods or services or both? This analysis needs to be de hors of the form of supplying the said land.

The term “goods” is defined under section 2(52) to mean every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply. Since in the instant case, the subject matter of the transaction is an immoveable property, it is evident that there is no supply of goods.

This takes us to the definition of the term “service” which is defined under section 2(102) to mean anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged. It is evident that service has been very loosely defined under GST. A literal reading of the definition indicates that anything which is not classifiable as goods would be a service. However, the context requires that a purposive interpretation rather than a literal interpretation of the definition should be adopted. The purposive interpretation would suggest that the subject matter of the transaction should bear an essential character of service.

In Hotel and Catering Industry Training Board vs. Automobile Proprietary Limited – (1968 (3) All. E.R. 399 (at page 402 (E)), Lord Denning speaking for the Court of Appeal explained as under:

“It is true that “the industry” is defined; but a definition is not to be read in isolation. It must be read in the context of the phrase which is defines, realizing that the function of a definition is to give precision and certainly to a word or phrase which would otherwise be vague and uncertain – but not to contradict it or supplant it altogether”.

In HariprasadShivshankar Shukla vs. A.D. Divelkar — AIR 1957 SC 121, a railway company was taken over by the Govt. of India. The railway company served a notice to its workmen to terminate the services of all workmen. The Supreme Court held that in ordinary acceptance, retrenchment connotes that the business itself is being continued but the portion of the staff or labour is discharged as surplusage. In view of the above ordinary acceptance, the Supreme Court held that the termination of service of all workmen as a result of the closure of business cannot be properly described as retrenchment as defined in Section 2(oo) of the Industrial Disputes Act, 1947.

From the above settled position for interpretation of a definition clause, it is clear that one has to find what is the ordinarily accepted version of the expression defined and, thereafter find whether the said ordinarily accepted version fits in with the requirement of the definition clause. However, the definition cannot be interpreted in a manner so as to destroy the essential meaning of the term defined.

Therefore, it needs to be seen as to what is the essence of the word ‘service’. Prior to the introduction of GST, the term service was defined under section 65B(44) of the Finance Act, 1994 to mean any activity carried out by a person for another for consideration. It thereafter included declared services and excluded certain transactions. The basic meaning attributed to the concept of service was any activity carried out by a person for another for a consideration which provides the essence of the general understanding of the word service and a similar context should be applicable in the GST law as well especially considering the fact that the GST Legislation in effect is consolidating many erstwhile indirect taxes rather than imposing a tax on some activities / sectors which were not taxable earlier.

We can also read the definition of service as being anything other than goods in the context of the Supreme Court decision in the case of Tata Consultancy Services Limited vs. State of Andhra Pradesh [2004 (178) ELT (022) SC] where the fundamental attributes of goods were listed. In the said case, the Hon’ble Court held that any property becomes goods if it satisfies the three conditions, namely utility, capability of being bought and sold and capability of being transmitted, transferred, delivered, stored and possessed. The relevant extracts are reproduced below for a ready reference:

It is not in dispute that when a programme is created it is necessary to encode it, upload the same and thereafter unloaded. Indian law, as noticed by my learned Brother, Variava, J., does not make any distinction between tangible property and intangible property. A ‘goods’ may be a tangible property or an intangible one. It would become goods provided it has the attributes thereof having regard to (a) its utility; (b) capable of being bought and sold; and (c) capable of transmitted, transferred, delivered, stored and possessed. If a software whether customized or non-customized satisfies these attributes, the same would be goods. Unlike the American Courts, Supreme Court of India have also not gone into the question of severability.

As rightly held in the above decision, any property, whether tangible or intangible is classifiable as goods if it has the following attributes, namely:

a.    The item should have a utility.

b.    The item should be capable of being bought and sold.

c.    The item should be capable of being transmitted, transferred, delivered, stored and possessed.

In fact, the concept of transferability provides the attribute of ‘anything’ becoming property. Such properties can be further classified into moveable properties, immovable properties, tangible properties or intangible properties. Some of these may constitute goods while some may not. When the concept of service is examined, it has to be examined vis-à-vis this aspect of transferability. If there is a possibility of transferability, it would not amount to a service.

Therefore, a view can be taken that land cannot be considered either as ‘goods’ or as ‘services’. At this point in time, it must be noted that there is a distinction between the subject matter of supply and the form / manner of the supply. For example, irrespective of whether a motor car is sold or leased, the subject matter of the supply being a motor car continues to remain ‘goods’ and would be treated as such under Section 7(1)(a) of the Act. However, in view of the principles of classification provided under Section 7(1A) read with Schedule II, the sale of a motor car would be treated as the ‘supply of goods’ whereas the lease of a motor car would be considered as the ‘supply of services’. Applying a similar analogy, ‘land’ being the subject matter of the current transaction, cannot be treated as goods or services or both and one need not get carried away by the form / manner of the supply to determine whether the land is goods or services. In other words, Schedule II which treats certain activities or transactions as the supply of goods or services or both shall not have any bearing on the decision of whether the transaction constitutes a supply of service or not.

IF YES, WHAT IS THE FORM / MANNER OF SUPPLY?

Once it is accepted that ‘land’ as a subject matter of the supply does not constitute either goods or services or both, this question becomes redundant. However, to address the said question, it is evident that the term ‘supply’ includes all forms of supplies such as sale, transfer, barter, exchange, licence, rental, lease or disposal. Therefore, merely restricting the analysis from the point of view of the form / manner of the supply and ignoring the subject matter of supply being goods or services or both, one may conclude that both sale as well as lease are within the scope of supply.

Ignoring the subject matter of supply being goods or services or both, one may be then tempted to refer to Entry 5 of Schedule III of the Act. The said entry, inter alia, specifies that the “sale of land” shall be treated neither as supply of goods nor supply of services. The verbiage under the said Entry could then be compared with the exclusion under the erstwhile service tax law wherein “a transfer of title in goods or immovable property, by way of sale, gift or in any other manner” was excluded from the definition of service. Therefore, one may be tempted to imply that the GST Law proposes to provide for a limited exclusion for ‘sale of land’ and other transfers pertaining to land are not explicitly excluded and therefore a subject matter of GST.

However, in this context, it may be important to appreciate that the levy of GST is not governed by Schedule III. It is rather governed by Section 9 read with Section 7(1). As discussed earlier, it is possible to argue that in the instant case, land cannot be considered either as goods or as services. It is an accepted principle in law that an exclusion clause, being a benevolent one, can only exclude something which was originally covered and would have no effect in cases where the original coverage itself is in doubt. More importantly, an exclusion clause cannot be reverse-read to presume the existence of taxability and cannot thereby cast an onerous burden on the taxpayer which never existed. Useful reference can be made to the decision of the Supreme Court in the case of Gypsy Pegasus Limited vs. State of Gujarat 2018 (15) GSTL 305 (SC).

Further, a long-term lease of 99 years in essence represents a transaction of sale of immovable property and cannot be considered as renting / service simpliciter. In fact, the purpose of the Corporations entering into a long-term lease arrangement is merely to retain control over the development of the region. It does not mean that the person who has been allotted the plots is not the owner of the plot. Various clauses in the lease agreement, the intention and conduct of the parties clearly vindicate this position.

The provisions of various enactments, particularly the Transfer of Property Act, 1882 and various decisions in the context of a diverse set of legislations including the Consumer Protection Act, 1986, and the Income-tax Act, 1961, etc. also support this proposition that a long-term lease arrangement, in substance, represents a transfer of a right in immovable property and not a service. The following table summarises some of these provisions:

Legislation / Agency / Judiciary Gist of the Relevant Provision / Decision
Tulsi vs. Paro — 1997 (2) SCC 706 (SC) A lease of an immovable property creates an interest or a right in favour of the lessee as against a license wherein no such right in the property is created.

 

In the proposed transaction, it is evident that transfer of leasehold rights in land against the receipt of a consideration constitutes a “demise” of property in favour of the transferee / lessee. Such an activity is clearly an activity of transfer of right in the immoveable property and therefore cannot be considered as a service.
Section 105 of the Transfer of Property Act, 1882 Lease is defined as a transfer of right to enjoy such property.
The Bombay Stamp Act, 1958 A person acquiring a land on lease for a period more than 15 years has to pay stamp duty on 90 per cent of the market value of the land which implies that such an acquirer is treated as an owner of the land himself and Stamp Duty is collected on an appropriate basis from him.
Foreign Exchange Management Act, 1999 A transaction of lease exceeding five years is treated as a capital account transaction by the Reserve Bank of India implies that the transaction is not that of procurement of service.
U.T. Chandigarh Administration & … vs. Amarjeet Singh And Ors (2009) 4 SCC 660 (SC) The auction of plot of land does not involve rendering of any service as there is no hiring or availing of services by the person bidding at the auction and consequently the act of leasing plots by auction by the appellants did not result in the successful bidder becoming a `consumer’ or the appellants becoming `service providers’.
Lucknow Development Authority and Ghaziabad Development Authority (SC) Clear distinction drawn between delay in granting possession of undeveloped existing sites on lease and developed sites, which categorizes the former as not
 entailing denial or deficiency in service.
Abhay Pratap Singh vs. Capital Promoters Pvt. Ltd 1992 73 CompCas 149 (SC) Clear exclusion of outright sale of immovable property by one person to another person from the definition of service under the MRTP Act, 1969.
Magus Construction Pvt. Ltd. vs. Union of India [2008 (11) S.T.R. 225 (Gau.)] The term service is defined as an activity which denotes transformation of use of goods as a result of voluntary intervention of the Service Provider and is an intangible commodity in the form of human effort. This clearly indicates that passive transactions involving
transfer of rights in immovable property cannot be classified as services.
European Union Court in Belgium vs. Temco Europe SA [Case C-284/03 of 18-11-2004] Leasing / letting of immovable property is a passive transaction and hence it would not be liable to VAT.
1) Assam Bengal Cement Company Limited vs. CIT [1955] 27 ITR 34 (SC)

 

2) DurgaMadiraSangh vs. Commissioner of Income Tax [1969] 72 ITR 769 (SC)

 

3) CIT vs. Panbari Tea Co. AIR 1965 SC 1871 (SC)

 Lease premium paid up front, when the lessee acquires the interest in the property, is a single payment made towards the acquisition of a right and is a capital income and cannot be termed as a rental income, which is received periodically against a stipulation for continuous enjoyment of benefits.
Mukund Limited [2007] 291 ITR (AT) 249 (Mumbai Tribunal) Lease premium cannot be termed as advance payment of rent or any payment towards rent, since it is a capital expenditure.
CIT vs. PrabhuDayal 1971 82 ITR 802 (SC) A distinction has to be drawn between a payment made for services or discharge of liabilities or compensation for termination of an income producing asset. The latter is not recurring in nature and hence cannot be a revenue receipt. The amount realized on account of grant of right to enter and construct on the premises followed by subsequent agreement to lease constitutes parting away of the plot of land and hence is a capital receipt.
Various Financial Institutions / Banks The lease premium paid by the allottee can be financed by the bank since the bank recognizes the lease premium as an amount paid towards acquisition of asset and not towards consumption of service.
Accounting Treatment in the books of the allottees The lease premium paid towards the rights purchased by various allottees is capitalized in their books of accounts and not treated as a service which is immediately consumed.

At this juncture, it may be relevant to examine the decision of the Bombay High Court in the case of Builders Association of Navi Mumbai vs. Union of India 2018 (12) GSTL 232 (Bom) wherein the Court held that one-time lease rent paid as consideration to Government agency, CIDCO, for the lease of land for residential / commercial purposes, was liable to Goods and Services Tax as any lease, tenancy, easement, licence to occupy land was covered under ‘supply of services’ under GST Act and only those transactions or activities of Government or Statutory authorities could be exempted which are specifically notified to be so which wasn’t the case in this particular scenario.

While the Bombay High Court decision may suggest that GST is payable on the grant of leasehold rights in a plot of land, it may be important to note that the said decision was heavily influenced by the law then prevailing. The scope of supply is provided under section 7(1). Sub-clause (d) thereof, at the relevant point of time, included the activities to be treated as supply of goods or supply of services as referred to in Schedule II within the scope of supply. The Hon’ble Court was guided by Entry 2(a) of Schedule II inter alia mentioning lease of land and the placement of sub-clause (d) to conclude that in view of the inclusive nature of Schedule II, the Court is prohibited from probing further in the said matter.

Further, the Bombay High Court also observed that Section 7(2) permitted the Government to notify certain activities as neither supply of goods or services and that no such notification was issued. The said observation of the Bombay High Court in para 12 of the said decision, with due respect is factually incorrect, since Notification 14/2017-CT(Rate) as amended by Notification 16/2018-CT(Rate) indeed provided for an exemption for services by way of any activity in relation to a function entrusted to a Panchayat or to a Municipality under article 243G or 243W of the Constitution.

However, subsequent to the pronouncement of the said decision, the CGST Act was amended with retrospective effect whereby sub-clause (d) was deleted from Section 7(1) and was introduced in a slightly different manner as Section 7(1A). Through the said retrospective amendment, it is specifically provided that only where certain transactions constitute a supply in accordance with Section 7(1), will they be treated as a supply of goods or services as mentioned in Schedule II. Effectively, the retrospective amendment relegates the entries mentioned in Schedule II as classification entries rather than deeming entries.

When the Bombay High Court decision was agitated in an SLP before the Supreme Court, the Hon’ble Supreme Court dismissed the SLP. However, it may be important to note that the Supreme Court clarified that it has not examined the question of exemption or the scope or ambit of expression in Clause 2(a) of Schedule II and left those issues open. As such, despite the dismissal of the SLP, it can be said that the final findings of the Bombay High Court decision are still open for judicial review.

The above discussion indicates that there is a possible view to suggest that entering into an agreement for the lease of land may not constitute a supply of goods or services or both and therefore, shall not attract the levy of GST. In that scenario, the exemption provided by entry 41 becomes redundant. It must be noted that merely because an exemption is granted does not make the transaction taxable in the first place, as held by the Hon’ble Supreme Court in the case of Larsen & Toubro Ltd. [2015 (39) S.T.R. 913 (S.C.)] wherein it has been held as under:

44. We have been informed by counsel for the revenue that several exemption notifications have been granted qua service tax “levied” by the 1994 Finance Act. We may only state that whichever judgments which are in appeal before us and have referred to and dealt with such notifications will have to be disregarded. Since the levy itself of service tax has been found to be non-existent, no question of any exemption would arise. With these observations, these appeals are disposed of.

In case it is ultimately held that the grant of long-term lease of land is not covered under the GST Law, it would logically follow that even a subsequent assignment of the leasehold rights should also be granted the same tax treatment. However, irrespective of the tax treatment of the original transaction, there are certain additional points which can be used to argue non-taxability for assignment transactions as discussed in the subsequent paragraphs.

Whether the transaction of assignment of lease is governed by the ‘scope of supply’?

Section 7(1)(a) defines the scope of supply for the purposes of the levy of GST. The said provision is triggered only when the supply is in the course or furtherance of business. When a person engaged in a business activity had acquired the lease rights in the said property with an intention to use the said premises for the business, carried on the business from the said premises for some years and then assigned the lease rights to a third party, the moot question that needs analysis is whether the assignment of the lease rights is in the course or furtherance of such person?

The term ‘business’ is widely defined under section 2(17) of the CGST Act, 2017 to include the following:

(a)    any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

(b)    any activity or transaction in connection with or incidental or ancillary to sub-clause (a);

(c)    any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;

(d)    supply or acquisition of goods including capital goods and services in connection with commencement or closure of business;

(e)    provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members;

(f)    admission, for a consideration, of persons to any premises;

(g)    services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation;

(h)    activities of a race club including by way of totalisator or a license to book maker or activities of a licensed book maker in such club; and

(i)    any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities;

It may be noted that the assignor may not be in the business of buying and selling immovable properties or obtaining and assigning leases in immovable properties. Therefore, by itself, the act of assigning the lease rights in the plot of land cannot constitute ‘business’ under sub-clause (a). Further, the action of assigning the lease right in the immoveable property cannot be considered to be incidental to the business and therefore sub-clause (b) is not attracted.

Clause (d) may become applicable only in limited cases when the assignment takes place on account of the closure of business. However, if the assignment takes place for other reasons, such as relocation of business, it cannot be said that the assignment of the lease rights is in connection with the closure of business (as the business continues) and therefore even sub-clause (d) is not applicable. No other subclauses of the definition of business are relevant to the current discussion. Therefore, it can be said the assignment of lease rights is not in the course or furtherance of its business and therefore, the same is not liable for GST.

One more aspect to examine is that Schedule II treats the lease of land as a service. Even if a conservative view is taken that Schedule II is inclusive and not clarificatory in nature, there is no relationship between a lessor and lessee, between the assignor and the intending Buyer. The Corporation continues to remain lessor in all situations. Through the assignment agreement, the assignor agrees to cease to be a Lessee and facilitate the Buyer becoming the Lessee. In the absence of a direct Lessor-Lessee relationship between the assignor and the Buyer, Entry 2(a) of Schedule II treating the lease of land as a service does not get triggered.

Therefore, a view can be taken that GST is not payable on the consideration for assignment / transfer of leasehold rights in the Land by the assignor to the Buyer.

If the assignor takes a conservative view, is the benefit of entry 41 available?

As discussed above, entry 41 conditionally exempts following services:

[Upfront amount (called as premium, salami, cost, price, development charges or by any other name) payable in respect of service by way of granting of long term lease of thirty years, or more) of industrial plots or plots for development of infrastructure for financial business, provided by the State Government Industrial Development Corporations or Undertakings or by any other entity having [20] per cent, or more ownership of Central Government, State Government, Union territory to the industrial units or the developers in any industrial or financial business area.]

The question that arises is whether the assignor can claim exemption on the assignment of the lease to a third party. The above-mentioned entry grants an exemption for an upfront amount (called as premium, salami, cost, price, development charges or by any other name) payable in respect of service by way of granting of long-term lease of thirty years, or more. While one may be tempted to treat such an exemption as restrictive only to the lessor, the usage of the words ‘any other amount’ expands the scope of coverage under the said entry.

In addition, a view can be taken that what is sought to be exempted is the amount payable for “service by way of granting of long-term lease of thirty years, or more) of industrial plots or plots for development of infrastructure for financial business, provided by the State Government Industrial Development Corporations… …”. It may be noted that after the assignment, the lessee changes but not the lessor. It must also be noted that the fourth proviso to conditions listed in Entry 41 has reference to subsequent lessee clearly indicating that the entire chain of transactions is sought to be exempted by the said entries. However, such exemption would be subject to the other conditions prescribed in the notification, one of which is the end use, i.e., the land should continue to be used for the purposes for which the lease was granted.

CONCLUSION

A plain reading of the provisions might tempt one to take a view that an assignment of long-term leasehold rights is a taxable supply of service and therefore liable for payment of GST. However, the stakes involved are substantial and with input tax credit eligibility at the recipient end also a potential issue, it is important that all probable options are evaluated before a final position is taken.

Service Tax

I TRIBUNAL

18. M/s. ODC Logistics Pvt. Ltd. vs. CST
2023-TIOL-639-CESTAT-KOL

Date of Order: 23rd June, 2023

Order beyond the scope of SCN is legally unsustainable. The conclusion based on assumptions and conjectures cannot deprive the assessee of the credit.

FACTS

Appellant provided logistics services including transportation of goods. Of the two issues involved in the show cause notice (SCN), the first related to RCM liability under Goods Transport Agency (GTA) service for payments made to suppliers of lorries on hire, based on expenses booked in financial statements as “freight charges”. The appellant contended that the supplier had not issued a consignment note and hence legally, it was not liable to pay service tax. However, the adjudicating authority proceeded by examining the nature of income of the appellant for providing output transportation services and observed that by avoiding issuing consignment notes for rendering output services, it could not avoid service tax liability as the appellant earned freight income and based on the said observation, service tax on GTA service was confirmed. For this conclusion, the appellant’s submission was that besides traveling beyond allegation in the SCN, which is the foundation of the levy and recovery, service tax liability could not be fastened when SCN did not contain allegations for liability on output services and further that service tax on GTA service is payable by the recipient of the service. In the second issue, CENVAT credit availed by the appellant on invoices issued by two specific vendors was disallowed on the ground that the department was unable to trace them at their office address and hence service providers were non-existent. For this, the appellant’s contention was that there was neither any investigation report brought on record nor was there any allegation made in the SCN as to having connivance with the service providers or that the service provider had not deposited by the service tax.

HELD

In the case of the demand under GTA service, the adjudicating authority traveled beyond SCN as the only allegation contained in the SCN was that the appellant did not pay service tax under RCM on expenditure involved on lorry hire charges / freight charges. However, the order conferring liability on the output services is beyond the scope of SCN and hence impermissible in law. Also, the Commissioner has accepted the order that lorry suppliers were not required to issue consignment notes and hence RCM cannot be invoked and hence the demand is set aside. On the issue of disallowance of CENVAT credit, it was observed by Hon. Bench that both SCN and the impugned order are silent on the inquiry report which was not made available at any stage of proceedings. Moreover, there being no allegation of any connivance with the service providers, the Bench was agreeable that denial of credit based on assumptions and conjectures cannot be held legally correct.

Hence the order was unsustainable and hence the appeal was allowed.

19. Alstom Projects India Ltd. vs. CCE
2023-TIOL-629-CESTAT-KOL

Date of Order: 2nd June, 2023

SCN issued after 4 years of information gathered is highly barred by limitation.

FACTS

The impugned order in this case confirmed the duty amount on compensation received on account of the cancellation of the order by West Bengal Power Development Corporation treating the same as additional consideration under Rule 6 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 by invoking extended period of limitation. The appellant submitted all material information regarding the non-receipt of two contracts, vide their letter dated 10th May, 2002 and subsequent letter dated 25th March 2003, and that as per the MOU, the appellant received the payment. The show cause notice, however, was issued in October, 2007 to the appellant engaged in the manufacture of boilers and boiler parts. The appellant was awarded two contracts, out of which one was canceled in 1994 on account of a financial crisis at the end of the client wherefore a cancellation order was passed to terminate the unexecuted portion of the contract to mutually agree on the amount of damages for cancellation. On a similar footing, another order of cancellation was issued in 2002 wherein also damages were payable by the contractee to the appellant. Despite the above, a show cause notice was issued as above on the grounds of suppression. The appellant submitted that damages did not attract excise duty and reliance in this regard was placed on various judicial pronouncements inter alia including the latest in the case of Skoda Auto Volkswagen India Private Limited vs. CCE, Aurangabad 2023-TIOL-149-CESTAT-MUM.

HELD

It was found that all the information was available to the department in 2003 itself and since no information was suppressed, the show cause notice issued four years later is not sustainable and is highly barred by limitation and hence merits of the case were not gone into and the appeal was allowed.

20. Maa Kalika Transport Pvt. Ltd. vs. Commissioner of CGST & CE
2023-TIOL-625-CESTAT-KOL

Date of Order: 10th July, 2023

The demand of service based on the IT department’s data is not sustainable based on merits as well as a limitation when it is without corroborative evidence. Also, the order was held beyond the scope of SCN.

FACTS

The appellant was issued a show cause notice in December, 2020 demanding a service tax of Rs. 9.50 crore  for the F.Y. 2015–16 based on the data received by the service tax department from the income tax department and which was confirmed by adjudicating authority under the category of cargo handling service by also imposing an equal amount of penalty under section 78(1) of the Act. Hence the appeal. According to the appellant, the bonafide belief is that they provided transportation service for which the service receiver is liable to pay service tax. They transported coal within a distance of 180 km. to 200 km. which was rightly classifiable as transportation of goods (GTA service) and hence service tax is not leviable under cargo handling service. Adjudicating authority was provided with work orders of various parties wherein terms of contract with each party were different. However, essentially the contracts were for the transportation of coal as per the appellant. Further, SCN had not specified any category for proposed demand of service tax.

HELD

In terms of the above facts, the issues before Hon. Tribunal was to examine which of two, viz. cargo handling service or transportation of goods was correct classification and also whether transportation service was bundled with other individual services and hence whether the contract could be vivisected and also whether the demand of tax under “cargo handling service” was beyond the scope of the SCN and whether the demand could be made based on the data received from income tax department without there being any corroborating evidence available with the department, Hence whether suppression was involved at all to demand service tax invoking extended period? Consequently, whether penalties could sustain at all. Based on a perusal of the contracts, it was found that the contracts were composite contracts but primarily for transportation and other services were incidental to it. The contract did not specify separate charges for such ancillary services and hence it could not be vivisected to arrive at a separate value for each service. Also, there was no proposal in the impugned SCN as to the classification of cargo handling service and hence adjudicating authority traveled beyond the scope of the notice which is legally unsustainable. Also as per the appellant, based on the data received from income tax, the department put in no effort to ascertain corroborative evidence and the impugned order contained no finding on this. This view also found support in the case of Larsen & Toubro Ltd. vs. ACST (2023) 2 Centax 327 (Cal.) and in CST vs. Hindustan Cables Ltd, 2022 (382) ELT 188 (Cal.). As for the existence of suppression, it was found that when the department itself was unclear about the classification, no suppression of the facts was involved. For this, reliance was placed on Ugam Chand Bhandari vs. CCE 2004 (167) ELT 491 (SC) and hence extended period was held as not invokable.

Thus, it was held that the appellant provided transportation services which were mutually bundled in the contracts. Further, since SCN did not have a proposal to demand service tax under cargo handling service, the order impugned traveled beyond the scope of the notice. The demand for tax could not be made only on the basis of data furnished by the income tax department without any corroborative evidence. Also when suppression did not exist and hence even on the ground of limitation, the demand would fail and consequently the penalty would not be sustained.

Goods And Services Tax

I. HIGH COURT

51. Dhanya Sreekumari vs. State Tax Officer (IB), State GST Department, Alappuzha
2023 (75) GSTL 404 (Ker.)

Date of order: 27th June, 2023

Cash not forming part of stock-in-trade cannot be seized during the inspection by the department as per section 67 of CGST Act.

FACTS

Petitioner was engaged in the manufacture and sale of Idly/Dosa batter, Parotta, Chappathi, etc. An inspection was conducted by the department in the manufacturing unit and at the residence of the petitioner. Cash amounting to Rs. 32,73,900 was found and seized from the residence of the petitioner. Pay-in-slips for depositing the amount in the bank were also found at the residence of the petitioner. Further, the petitioner made representation before the department for the return of seized cash but no action was taken.

HELD

Cash cannot be seized where it was not forming part of the stock-in-trade of the petitioner. Further, pay-in-slips indicated that cash was intended to be deposited in the bank. Hence, there was no reason to retain it further. It was directed to release the seized cash forthwith. The petition was disposed of in favour of the petitioner.

52. APJ Investments Pvt Ltd vs. Asst. Commr. of CGST, Delhi West
2023 (75) GSTL 451 (Del.)

Date of order: 9th May, 2023

Application for revocation of cancellation of GST registration restored where SCN did not provide reasons for cancellation.

FACTS

Petitioner was issued a SCN for cancellation of registration dated 22nd August, 2022 stating that the petitioner had obtained registration by means of fraud, wilful misstatement, or suppression of facts. The petitioner denied the allegations and claimed that it was in the process of winding up its business in Delhi and would voluntarily file an application for cancellation of registration once its import consignments arrived at New Delhi. SCN did not specifically indicate reasons for proposing to cancel the petitioner’s registration. The Proper Officer rejected the response filed by the petitioner and passed an order dated 13th October, 2022, whereby the petitioner’s GST registration was cancelled. Subsequently, the petitioner applied for revocation of cancellation of registration which was rejected and a new SCN dated 11th November, 2022 was issued to which the petitioner did not respond. Further, the petitioner’s application for revocation was rejected by an order dated 28th November, 2022. Thereafter, an appeal filed by the petitioner against the order was rejected on the ground that the petitioner had shifted its premises. Being aggrieved, the petitioner preferred a writ before the Hon’ble Court.

HELD

The Hon’ble High Court held that the SCN issued dated 22nd August, 2022 did not provide necessary particulars for cancellation of registration. It is a well-settled law that SCN must set out reasons for proposing an adverse action in order for the noticee to respond to the same. Undisputedly, in this case, the impugned SCN did not satisfy the said standards. Therefore, it would be appropriate to restore the petitioner’s application for revocation of cancellation of its GST registration. Hence petitioner be granted further opportunity to respond to SCN dated 11th November, 2022 and the opportunity to be heard. Petitioner’s application to be decided afresh.

53. B.C. Power Controls Ltd. vs. Union of India 2023 (75) GSTL 465 (Raj.)

Date of order: 18th April, 2023

Application for refund cannot be withheld on the grounds of pendency of certain other proceedings.

FACTS

Petitioner was engaged in the business of exporting electrical wires and allied products. Petitioner filed a refund claim and considered the shipping bill for application of refund as per section 54 of the CGST Act read with section 16 of the IGST Act and Rule 96 of CGST Rules. Regardless of repeated representations, the respondent did not decide on the claim for the refund as there were allegations against the petitioner that fake invoices were raised for the purpose of claiming the refund. As a result, two SCNs were issued under section 74 of the CGST Act and refund proceedings were kept on hold. According to the respondent, once the pending proceedings are concluded the claim of refund would be decided.

HELD

It was held that the application for a refund once filed needs to be addressed as per the provisions of the law and cannot be kept pending on the grounds of pendency of certain other proceedings. As per revenue’s claim, since this case involved allegations of raising fake invoices and the matter was under investigation, no direction for refund was issued. However, the respondent was directed to decide the petitioner’s refund application.

54. Diya Agencies vs. State Tax Officer [2023] 154 taxmann.com 421 (Kerala)

Date of order: 12th September, 2023

The input tax credit cannot be denied merely on the ground that the concerned invoice does not appear in GSTR-2A. If on examination of the evidence submitted by the assessee, the assessing officer is satisfied that the claim is bonafide and genuine, the assessee should be given input tax credit.

FACTS

The petitioner’s claim for ITC was denied on the ground that as per GSTR-2A in respect of a supply invoice, the taxpayer is only eligible for the input tax amount shown in GSTR-2A.

HELD

The Hon’ble Court held that if the seller dealer (supplier) has not remitted the said amount paid by the petitioner to him, the petitioner cannot be held responsible. The Court relied upon the decision in the case of The State of Karnataka vs. M/s Ecom Gill Coffee Trading Private Limited 2023 (3) TMI 533 SC and held that whether the petitioner has paid the tax amount and whether the transactions between the petitioner and seller dealer are genuine are the matter of facts and evidence. The petitioner has to discharge the burden of proof regarding the remittance of tax to the seller dealer by giving evidence. The Court thus set aside the impugned order holding that merely on the ground that in Form GSTR-2A the said tax is not reflected should not be a sufficient ground to deny the assessee the claim of the input tax credit and remanded the matter with a direction to the concerned revenue authority to allow the petitioner to give evidence to establish genuineness of his claim for input tax credit.

55. AEW Technologies LLP vs.
Assistant Commissioner of Revenue,
Bureau of Investigation
[2023] 154 taxmann.com 265 (Cal.)

Date of order: 29th August, 2023

Where revenue recovered the amount in excess of the statutory pre-deposit required to be made before the first appellate authority and tribunal and that too before the expiry of the period for filing of the appeal, the Court directed the authorities to refund the excess amount.

FACTS

The petitioner challenged the order of the first appellate authority and was also aggrieved by the fact that the department initiated recovery for the amounts which are more than the statutory pre-deposit requirements before the first appellate authority and the second appellate authority; and that such amounts were recovered even before the expiry of the statutory period of time to file the appeal before Tribunal.

HELD

The Hon’ble Court directed the authorities to refund the excess amount of pre-deposit to the petitioner.

56. Vaishnavi Metals vs. Assistant Commissioner (ST) (Madras)
[2023] 154 taxmann.com 331
Date of order: 11th September, 2023

The Court quashed the recovery proceeding pending the disposal of the petitioner’s rectification application by the authorities.

FACTS

The petitioner received an adjudication order along with impugned recovery notices. However, owing to certain errors in the order, the petitioner filed a rectification application against the said order. The department initiated a recovery proceeding against the petitioner.

HELD

The Hon’ble Court quashed the recovery proceeding since the rectification applications were pending and directed the revenue authorities to dispose of the petitioner’s rectification application expeditiously.

57. Zydus Wellness Products Ltd vs. UOI [2023] 154 taxmann.com 261 (SIKKIM)

Date of order: 12th September, 2023

The benefit of the Budgetary Support Scheme for the “remainder period” cannot be given to the new entity when there is a change of ownership. The petitioner’s argument that the exemption should be based on the unit and not on the ownership is not accepted by the Hon’ble Court.

FACTS

The petitioners, Zydus Wellness Products Ltd (Zydus) and Alkem Laboratories Ltd (Alkem) approached the Court seeking a direction to allocate fresh Unique Identity (UID) in the name of new entities and to extend the benefit of the Budgetary Support Scheme (‘Scheme’) to them for the residual period. In the case of Zydus, the partnership firm was converted into a company in February 2019 and in the case of Alkem, a unit belonging to Cachet Pharma was transferred to Alkem as a going concern. The parties had approached the Ministry for obtaining a necessary clarification in this regard and CBIC had opined that as per the guidelines of the Scheme, if any unit undergoes relocation, expansion and change of ownership, it would not be eligible.

HELD

Referring to the definition of ‘person’ under section 22 of the CGST Act, 2017, the Hon’ble Court held that the erstwhile partnership firm of Zydus and the company as also the Cachet Pharma and Alkem are separate and distinct legal entities and required to obtain a separate registration under section 22 of the CGST Act. The Court also observed that the Scheme therefore was a measure of goodwill only to the units that were eligible for drawing benefits under the earlier excise duty exemption/refund schemes but has otherwise no relation to the erstwhile schemes. The Court therefore held that the petitioners who are separate legal entities qua the previous persons who were eligible for the Scheme, could not have filed an application under the said Scheme and were not the eligible units as defined in paragraph 4.1 of the said Scheme. The Court further held that the exemption under Notification No. 20/2007-CE was intended for those who have made investments in the State of Sikkim and not for those who have not made investments. The Court concluded that it was the previous owners who had invested to be eligible for the scheme and not the petitioners and accordingly their petition was dismissed. The petitioner’s argument that the exemption should be based on the unit and not on ownership is not accepted by the Hon’ble Court.

Recent Developments in GST

AMENDMENT IN ACTS

The Goods and Services Tax Council (GST Council) in its 50th and 51st meetings considered representation from various associations on the issues regarding the taxability of Casinos, Horse Racing and Online Gaming and recommended making certain amendments in the Central Goods and Services Tax Act, 2017 (the Act) to provide clarity regarding taxability of Casinos, Horse Racing and Online Gaming. Accordingly, CGST Amendment Act and IGST Amendment Act, both dated 18th August, 2023 are passed and notified in Gazette.

B. NOTIFICATIONS

1.    Notification No. 39/2023 — Central Tax dated 17th August, 2023

By the above notification, the Amendment is made in Notification No. 2/2017 dated 19th August, 2017 by which some entries are substituted which are regarding territorial jurisdictions.

2.    Notification No. 40/2023 — Central Tax dated  17th August, 2023

The above notification seeks to appoint common adjudicating authority in respect of show cause notices issued to M/s United Spirits Limited.

3.    Notification No. 41, 42, 43 & 44/2023 — Central Tax dated 25th August, 2023

By the above notifications, the extension of time is granted for furnishing of Form GSTR-1, return in Form GSTR 3B (monthly/ quarterly) and GSTR -7 respectively for taxpayers registered in Manipur. The extension is up to 25th August, 2023 for all the above returns.

4.    Notification No.45/2023 — Central Tax dated  6th September, 2023

By the above notification, the CGST Rules are amended. These amendments are in relation to valuation for online gaming including online money gaming and actionable claims in the case of Casinos. For this purpose, Rules 31B & 31C have been inserted.

C. ADVISORY

a)    The information is given by GST: The Advisory is about “Mera Bill Mera Adhikaar Scheme” dated 24th August, 2023.

b)    The GSTN has further informed about introducing “Electronic Credit reversal and Re-claimed statement” dated 31st August, 2023.

D. ADVANCE RULINGS

34. Exemption vis-à-vis Agreement with NSDC
Nxtwave Disruptive Technologies Pvt Ltd (Order No.: A.R. Com/12/2022 dated 27th September, 2022 (TSAAR Order No. 50/2022) (Telangana)

M/s Nxtwave Disruptive Technologies Private Limited has filed this application (name referred to as Nxtwave).

Nxtwave was founded by IIT Bombay, IIT Kharagpur and IIT Hyderabad alumni — Sashank Reddy Gujjula, Anupam Pedarla and Rahul Attuluri. The Nxtwave offers training programs in Industry 4.0 Technologies for college students, graduates, and early professionals.

The Nxtwave aims to empower 150 million college students and recent graduates, between the age groups of 18-24, into highly-skilled professionals to gear up for the 4.0 revolution.

National Skill Development Corporation (“NSDC”), a Section 25 Company under Companies Act, 1956 (corresponding to section 8 of the Companies Act, 2013), was initially set up under the Prime Minister’s National Council on Skill Development with the primary mandate of enhancing and supporting private sector initiatives for Skill Development in India through appropriate Public-Private Partnership (“PPP”) models and striving for significant operational and financial involvement from the private sector. At present, NSDC functions under the aegis of the Ministry of Skill Development & Entrepreneurship (“MSDE”).

NSDC through this Scheme endeavors to create a sustainable and enabling skill training ecosystem by promoting the provision of market-led fee-based Services under the various models like:

(i) self-financed by the candidate,
(ii) financed by the candidate or partner through a loan or under an income sharing arrangements with the partner etc.

Any Eligible Entity having relevant experience in Skill Development can submit a Proposal to become a Partner of NSDC. The Proposal shall be in the prescribed format and shall include details of the services proposed to be offered by the Partner under the Scheme.

Both the Nxtwave and NSDC have entered into an agreement dated 9th June, 2022 to further their objectives, and the Nxtwave has been recognized as a “Training Partner” of the NSDC with effect from 9th June, 2022.

As per the agreement, Nxtwave shall offer its training programs, as detailed in the proposal approved by the NSDC, as amended from time to time with the approval of NSDC.

The scheme extends mutual benefits to all stakeholders, like NSDC, Nxtwave as well as students.

With the above background, following questions were raised before AAR:

“Q1: Whether training programmes offered by the applicant, as approved by NSDC would be construed under the “any other scheme implemented by the NSDC” as required under Serial No. 69 of the Notification and the benefit of GST exemption would be available to the applicant from the date of its agreement with NSDC?

Q2: Whether the training programmes offered in collaboration with other business partners, imparted by business partners of the applicant under a subcontract would be construed under the “any other scheme implemented by the NSDC” as required under Serial No. 69 of the Notification and the benefit of GST exemption would be available to the applicant?

Q3: Exemption of GST is available to the company as a whole as long as its services fulfill the criteria laid down under serial no.69 of the said notification and not limited to Telangana GST?”

Applicant justified its claim of exemption raised in questions, on the ground that Applicant is rendering education and training services under the following models:

CCBP Intensive:
CCBP Intensive enables tech job aspirants (college graduates and early professionals) to get a software job. The details of the program can be referred to on the company website (www.ccbp.in).

CCBP Academy:
CCBP Academy enables college students from engineering & technology colleges to become industry-ready by the time of their graduation and achieve high-paid software jobs.

It was submitted that the above services are covered within the HSN 9992.

It was also submitted that the applicant is an approved training partner of the NSDC and that the project under implementation is already approved by the NSDC and an agreement is executed between parties.

Therefore, a claim was made that the activity is exempt under Entry No. 69 in Notification No. 12/2017 — Central Tax (Rate) issued by the Ministry of Finance dated 28th June, 2017.

The second question was also justified to be exempt as the subcontract is made simply for the furtherance of the objectives of the scheme and is on a principal to principal basis.

Regarding question 3, it was submitted that the exemption of GST shall be available to the company as a whole and not just under the Telangana GST Act.

The ld. AAR made a reference to Entry 69 of Notification No. 12/2017 which provides an exemption to,

“Any services provided by, —
(a) ………….
(b) ………….
(c) ………….
(d) A training partner approved by the National Skill Development Corporation or the Sector Skill Council, in relation to —
(i) The National Skill Development Programme implemented by the National Skill Development Corporation; or

(ii) A vocational skill development course under the National Skill Certification and Monetary Reward Scheme; or

(iii) Any other Scheme implemented by the National Skill Development Corporation.”

The ld. AAR made detailed reference to the object of NSDC and the scheme of exemption granted in Entry 69. The ld. AAR observed that for Entry 69 the service provider has to be a training partner approved by the National Skill Development Corporation or the Sector Skill Council. The applicant has submitted the attested photocopy of the certificate of Partnership which shows that the applicant is the Approved Training Partner of the National Skill Development Corporation (NSDC) from 23rd June, 2022, up to 22nd June, 2023. Therefore, the ld. AAR held that the applicant is presently an Approved Training Partner of NSDC.

The ld. AAR noted further requirements, whether the application is providing any services in relation to any other Scheme implemented by the National Skill Development Corporation. In this context, the ld. AAR found that the applicant is providing courses in relation to the Scheme for market-led fee-based services by the National Skill Development Corporation.

The ld. AAR also found that the applicant has entered into agreement with NSDC dated 23rd June, 2022 which substantiates a partnership with NSDC for executing training under the above scheme for market-led fee-based services under non-funded affiliation.

The ld. AAR also found that the applicant is offering training programs, as detailed in the proposal approved by the NSDC as amended from time to time with the approval of NSDC, mentioned above, like CCBP.

The ld. AAR concluded that the services provided by the applicant are as the training partner approved by the National Skill Development Corporation and are in relation to the Scheme implemented by the National Skill Development Corporation.

Accordingly, the ld. AAR held that the services offered by the applicant fall under Sl. No. 69 (d) (iii) and therefore eligible for exemption under Notification No. 12/2017 for CGST and SGST.

So far as the second question is concerned, the ld. AAR observed that as per Entry 69, the services supplied by the applicant as an approved training partner of NSDC in relation to any other scheme implemented by the NSDC are exempt but not the services received by the applicant from others including a sub-contractor who supplies such services to the applicant, as he is not a training partner approved by the National Skill Development Corporation or the Sector Skill Council. Therefore, the ld. AAR answered question (2) in negative.

Accordingly, the first issue is decided in the favour of the applicant holding the activity as exempt. However, in relation to question (2), the AAR ruled in negative.

In respect of question (3), the learned AAR held that the only services covered by Entry 69 are exempt and not others.

35. Nature of Contract for operation and maintenance of Dam Work
Secure Meter Ltd. (AR No. RAJ/AAR/2022-23 dated 12th October, 2022 (Raj.)

The applicant i.e., M/s Secure Meter Limited, E-Class, Pratap Nagar Industrial Area, Udaipur is engaged in providing compressive water services and currently is in the process of bidding for a tender floated by the PHED, a unit of the Government of Rajasthan for the Operation and Maintenance of the Mansi Wakal Dam Stage-I.

The applicant has explained various aspects of the contract.

The applicant has raised the following questions:

“1.     Whether the activity of operation and maintenance is to be considered as Supply of goods or a Supply of Services under CGST / RGST Act 2017? Accordingly, whether the transaction can be sub-classified as a “Pure Supply of Service” or “Pure Supply of Goods” or “Composite supply of goods and services being a works contract?

2. Whether the applicant is entitled to the benefit of exemption under Entry 3 A of Notification No. 12/2017 — Central Tax (Rate) dated 28th June, 2017, as amended? If not, what is the applicable rate of tax?”

Based on the written submission made by the applicant and given details, the ld. AAR found that applicant is in the process of bidding for a tender floated by the PHED, a unit of the Government of Rajasthan for the Operation and Maintenance of the Mansi Wakal Dam Stage-I complete system, including mechanical, electrical, instrumentation installation works, switchyards / GSS and maintenance of Dam, pumping machinery, pipe line & tunnel from Mansi Wakal Dam to Nandeshwar filter plant project on ESCO and O&M contract. The terms and scope of the contract combines ESCO Model and O&M contract.

Based on the scope of work as detailed in contract / Tender Document NIT No. 03 / 2021-22, the ld. AAR observed that the ESCO model requires improvement of the whole water supply system involving pump houses, pumping stations, transmission lines, switchyards, and headwork. Re-modelling of pump foundation and extension of pump house, replacement of fittings / fixtures and painting of all permanent structures like pumping station building, Dam, Tunnel etc. are involved in the contract. It was further observed that a single tender shall be floated for Operation and Maintenance of Dam, pumping machinery, pipeline & tunnel on ESCO Cum O&M Contract where the preamble of scope specifies that the contract combines ESCO model and O&M work. It was observed that the activities under the ESCO model and the O&M contract are closely linked.

The ld. AAR referred to the meaning of works contract, Composite Supply and meaning of immovable property. Based on facts that the main intention is to supply maintenance services, the ld. AAR observed that the activity also involves the use of materials. It was also observed that all the components of the pumping system are erected at the prescribed location and permanently attached to the earth and they cannot be dismantled and reassembled, as such dismantling may cause substantial damage to the system and its components. Therefore, the activities to be undertaken by the applicant with respect to Operation and Maintenance are for an immovable property i.e., Mansi Wakal Dam and the given work is works contract, held by the ld. AAR. Accordingly, it was also held that all the conditions of composite supply are satisfied, therefore it is a composite supply of works contract. It was also observed that as per the break-up of material cost under the Operation & Maintenance of Mansi Wakal water project provided by the applicant, the value of supply of goods is 11.50 per cent i.e., below 25 per cent out of the total value of supply and hence, the applicant is eligible for exemption under Entry No. 3A of Notification No. 12 / 2017-CT (R) dated 28th June, 2017.

The ld. AAR gave the ruling as under:
“The activity of O & M of Mansi Wakal Dam Project on ESCO Model and O & M work by the applicant is to be undertaken /being undertaken for a Government Department. In this activity of Composite supply of goods and services, the applicability of GST will be as under:

(a) Composite supply of goods and services where supply of goods is below 25 per cent out of the total value of supply then GST will be @ NIL.

(b) Composite supply of goods and services where the supply of goods is more than 25 per cent of the total value of supply then GST will be @12 per cent (SGST 6 per cent + CGST 6 per cent).”

36. Classification — Satin Rolls, Taffeta Rolls
Mean Light Co. (AR No. KAR/ADRG-43/2022 dated 29th November, 2022 (KAR)

The applicant has raised questions about the “classification of products “Satin Rolls” and “Taffeta Rolls” with sizes between 19 mm to 40 mm.

The brief facts about the products are narrated as under:

“Satin Rolls: Made with 100 per cent polyester, the rolls are available having a width between 10 mm to 810 mm. We mainly deal with sizes between 19 mm to 40 mm. The same will be sold to printers for printing purposes. The ultimate customers of the products are the companies engaged in manufacturing of readymade garments. The products will be ultimately used for the purposes of printing wash care instructions & fabric contents (to capture instructions).

Taffeta Rolls: Made with 100 per cent Nylon and dip quoted sizes available in the market from 10 mm to 810 mm. We mainly deal with sizes between 19 mm to 40 mm. The same will be sold to printers for printing purposes. The ultimate customers of the products are the companies engaged in manufacturing of readymade garments. The products will be ultimately used for the purposes of printing wash care instructions & fabric contents (to capture instructions).”

Applicant further supplied the following information:

“11.1 Taffeta Rolls: The standard manufacturing size of the fabric is 60 inches / 1524 mm wide fabric, made up of polyester yarn. Acrylic coating is made on the fabric for better printing quality and also to protect from raveling or fraying, then will be cut in different sizes and shapes as normal scissor cut.

11.2 Polyester Satin Ribbons: The fabric is made from polyester yarn, standard manufacturing size is 60 inches / 1524 mm wide. Either optical or non-optical coating is made on the fabric for brightening and to remove impurities. Optical brighter coating will give shiny and bright finishing and non-optical dull finishing. It has plain selvedges on both sides of the fabric. Hot blades are used to cut into different shapes and sizes which arrest the fabric from fraying.”

The ld. AAR examined the classification of the impugned products.

The ld. AAR made reference to the Section Notes and Chapter Notes of the relevant Chapters of the Customs Tariff and also the corresponding Harmonised Commodity Description and Coding System Explanatory Notes of the World Customs Organisation (WCO).

The ld. AAR noted that Chapter 5806 of the first schedule to the Customs Tariff Act, 1975 covers NARROW WOVEN FABRICS OTHER THAN GOODS OF HEADING 5807; NARROW FABRICS CONSISTING OF WARP WITHOUT WEFT ASSEMBLED BY MEANS OF AN ADHESIVE (BOLDUCS). Read with Notes of Chapter 58, the ld. AAR noted that the impugned products, as per the applicant, are woven fabrics having the width of less than 30 cm; that Taffeta rolls are made up of polyester yarn with acrylic coating to protect from raveling or fraying and also to have better printing quality; It also noted that Satin rolls are made up of polyester yarn, with optical or non-optical coating for brightening and to remove impurities, having plain selvedges on both sides of the fabric; and cut with hot blades to arrest fabric fraying. Therefore, the impugned products qualify to get covered under “Narrow Woven Fabrics”, observed the ld. AAR.

The ld. AAR also referred to Chapter 5807 which covers labels, badges and similar articles of textile materials, in the piece, in strips or cut to shape or size, not embroidered. Referring to Explanatory Notes to tariff heading 5807, the ld. AAR observed that this heading covers (i) Labels of any textile material (including knitted) and (ii) Badges and similar articles of any textile material (including knitted), subject to the following conditions:

a) They must not be embroidered. The inscriptions or motifs on the articles classified here are generally produced by weaving (usually broche work) or by printing.

b) They must be in the piece, in strips (as is usually the case) or in separate limits obtained by cutting to size or shape but must not be otherwise made up.

The ld. AAR found that the impugned products are not embroidered and fulfill the aforesaid conditions. Therefore, the ld. AAR held that the impugned products merit classification under tariff heading 5807 10 20.

37. Exemption vis-à-vis Government Authority
Hyderabad Metropolitan Water Supply and Sewerage Board (AR No. AAAR.Com/09/2022 dated
2nd November, 2022 (Telangana)

The Appellant filed this appeal against AAR dated 3rd June, 2022 wherein the Question posed before it was decided as under:

“Question Ruling
1. Is Medical insurance premium taken to provide Health Insurance to the employees, pensioners and their family members, eligible for exemption as mentioned in Entry No. 3 of the Notification No. 12/2017 – Central Tax (Rate), dated
28th June, 2017?		 No
2. Is the Vehicle Insurance Policy taken to provide insurance to the vehicles owned by the Board, eligible for exemption as mentioned in Entry No. 3 of the Notification No. 12/2017 – Central Tax (Rate), dated  28th June, 2017? Yes, if the vehicles are directly used to provide services under Schedule XII of the Constitution.

No, if they are used for transportation of employees/board members/other persons with no direct relationship to functions discharged under Article 243W.”

The ld. AAAR referred to the factual position that Hyderabad Metropolitan Water Supply and Sewerage Board (The Board) was constituted on 1st November, 1989 under the provisions of Hyderabad Metropolitan Water Supply and Sewerage Act 1989, with the following Functions & Responsibilities in the Hyderabad Metropolitan Area.

•    The Supply of potable water including planning, design, construction, maintenance, operation & management of the water supply system.

•    Sewerage, Sewerage Disposal and sewerage treatment works including planning, design, construction, maintenance, operation & management of all sewerage and sewerage treatment works.

The ld. AAAR also observed that from 1st July, 2017 to 17th November, 2021 as per Sl. No. 3 of Central Tax (Rate) Notification No. 12/207 dated 28th June, 2017 the rate of tax on the supply of the following services is Nil.

“Sl. No. Chapter Section

Heading Group or Service Code

 Description of
services		 Rate

(per

cent.)

 Condition
3 Chapter 99 Pure services (excluding works contract service or other composite supplies

involving the supply of any goods) provided to the Central Government, State

Government or Union territory or local authority or a Governmental authority [or a Government Entity] by way of any activity in relation to any function entrusted to a Panchayat under Article 243G of the Constitution or in relation to any function entrusted to a Municipality under Article 243W of the Constitution.

 NIL NIL”

The ld. AAAR concurred that the Appellant is the Government Authority as per the meaning of the same given in section 2(zf).

The ld. AAAR observed that since the Hyderabad Metropolitan Water Supply and Sewerage Board is a board set up by an act of state legislature to carry out any function entrusted to a Municipality under Article 243W, it is a ‘Governmental Authority’ as per the above definition.

The Appellant had contended that the following supply of services to them is eligible for exemption under Sl. No. 3 mentioned above:

1) Insurance services provided to the board for insuring their employees and their family members.

2) Insurance services provided to the vehicles of the board.

The ld. AAAR also observed that services are exempted if the following conditions are satisfied.

“1)The services provided should be Pure services (excluding works contract service or other composite supplies involving the supply of any goods).

2) The services provided should be by way of any activity in relation to any function entrusted to a Municipality under Article 243W of the Constitution.

3) After 01-01-2022, the exemption is available only if it is provided to the Central Government, State Government and Local Authority only”.

Based on the above position, the ld. AAAR held that if the services procured by the board are by way of any activity in relation to any function entrusted to a Municipality (like water supply and sewerage), then only the supply is exempt from tax as per condition at Sl. No. 2 above.

The ld. AAAR held that the insurance supplies made to the board for its employees and their family members are not in relation to any function entrusted to the municipality.

The ld. AAAR held that the word ‘in relation to’ will include only functions which are in direct relation to the entry like water supply and sewerage.’

Relevant judicial pronouncements were also referred to.

Therefore, the ld. AAAR held that the insurance services for employees and employees’ family members received by the applicant is not in direct and proximate relation to water supply and sewerage related function entrusted under Article 243W, hence the supply received by the applicant does not fall under Sl. No. 3 of Central tax (rate) Notification No. 12/2017 and are not exempt.

The ld. AAAR also held that the board also receives insurance services for vehicles which are used for transportation of water and sewerage management.  These vehicles are essential for performing the functions as entrusted in 243W of the constitution, the ld. AAAR held that the applicant is eligible for exemption under Entry mentioned above services in relation to all other vehicles which are not used for performing the functions as entrusted in 243W of the constitution shall be taxable, held the ld. AAAR.

Regarding the period from 1st January, 2022, due to changes in Entry 3, by which the Government Authority is omitted from said Entry, the ld. AAAR concurred with AAR that no service will be exempt. In view of the above, the ld. AAAR confirmed the AR.

38. Recovery from employees towards Canteen Facility — Liable to GST
Federal Mogul Goetze India Ltd (AR No. KAR-ADRG-42/2022 dated 29th November, 2022 (KAR)

The applicant, a manufacturer of auto parts, has to maintain the canteen facility as per Factories Act, 1948. The Factories Act provides canteen facilities to all their employees including contractual employees. In the present case, the said canteen is operated by the applicant and all the equipment and items essential for running the canteen such as groceries, utensils, cooking equipment etc., are arranged by the applicant. The applicant entered into a separate contract with a service provider for providing / supplying manpower required to manage the canteen operations. The service provider raises monthly invoices towards the supply of manpower for canteen operations and charges applicable GST.

On the above facts, the applicant has sought an advance ruling in relation to the applicability of GST on the deductions made from the salary of the employees raising the following questions:

‘Whether the subsidized deduction made by the applicant from the employees who are availing food in the factory would be considered as a “supply” by the Applicant under the provisions of Section 7 of the CGST / KGST Act 2017.

a. In case the answer to above is yes, whether GST is applicable on the nominal amount being recovered by the Applicant?

b. Whether Input Tax Credit (“ITC”) of the GST charged by the Service Provider would be eligible for availment to the Applicant?”

The applicant also submitted that with respect to regular employees they deduct Rs.50 from salary and for contract employees Rs.10.

The argument of the applicant was that it is not liable under GST on the above recoveries. The submission was based on three grounds:

(i)    It is not ‘supply’ as per section 7 of the GST Act.

It was contended that there shall be a legal intention of both the parties to the contract to supply and receive the goods or services or both. The absence of such intention would mean that there is no supply within the meaning of the CGST Act.

The further contention was that there was no consideration. The supply should involve quid pro quo — viz., the supply transaction requires something in return, which the person supplying will obtain, which may be in monetary terms / in any other form except in cases of deeming provision as specified in Schedule I. Applicant submitted that in its present case, the transaction is only money transaction and no ‘quid pro quo’ available as the applicant is running a canteen as mandated under the Factories Act, 1948.

The ld. AAR observed that there is the legal intention to provide canteen food and therefore the contention that applicants do not have any legal intention for the provision of a canteen is contrary to the obligation placed on the applicant under the Factories Act, 1948. The ld. AAR also observed that the contractual relationship is evident from the fact that the applicant is charging employees R50 per month from the payroll and union employees and R10 per meal from contract employees. The ld. AAR observed that since the charges are pre-decided and deducted from the salaries, which are also agreed upon by the employees, a contractual relationship is clearly established between the applicant and their employees.

(ii)    Regarding the contention that there is no consideration, the ld. AAR observed that as per the definition of ‘consideration’ in section 2(31) the consideration includes any payment made or to be made, in response to, the supply of goods or services or both. Adequacy of consideration or otherwise is not a factor in deciding whether the activity amounts to supply or not. The ld. AAR held that the fact that a consideration is being charged by the applicant and paid by the employee is sufficient to establish a contractual relationship with reciprocal obligations leading to the supply of service. The ld. AAR rejected the argument of the applicant that there is no quid-pro-quo between them and the employee is factually and legally not sustainable.

(iii)    Regarding the third argument that it is not in the course or furtherance of business, the ld. AAR, after noting the definition of ‘business’ in section 2(17) observed that the applicant is a manufacturer and thus their activity is covered under Section 2(17)(a) of the CGST Act. The ld. AAR further observed that Section 2(17)(b) stipulates that any activity/transaction in connection with sub-clause (a) i.e., Section 2(17)(a), is included in the ‘business’. Since in the instant case, the applicant is running the canteen in connection with the manufacturing activity, the ld. AAR held that providing a canteen facility is incidental to their main activity of manufacture, and therefore covered in the definition of ‘business’ in terms of Section 2(17)(b). The ld. AAR also held that the canteen factory is also in furtherance of business as, if such facility is not provided the quantum of production will get affected as employees will move out for food which will be time consuming.

Regarding the contention of the applicant that the activity is covered by Entry I in Schedule III the ld. AAR held that the said provision is not applicable to the instant case as the issue pertains to the services being provided by the employer to the employees and not vice-versa. As per Entry I of Schedule III, only services by employees to employers are exempted and not services by employers to employees.

In respect of reference to the rulings of various advance ruling authorities and Appellate authorities, the ld. AAR observed that in such cases the canteen facilities were provided by third parties and collection of employees’ share and payments to canteen service providers without profit was held as not amounting to supply by the employer. However, since in the instant case, the applicant themselves are providing the canteen facility, the ld. AAR held that the advance rulings cited before it are not relevant to the facts of the case.

It is also observed that advance rulings are extended to the applicants only and can’t be generalized and applied to all and therefore ld. AAR declined to follow them.

The ld. AAR also referred to the question as to whether GST is applicable on the nominal amount being recovered by the applicant?

The ld. AAR made detailed reference to provisions of valuation like section 15.

In light of the provision of Explanation (a)(iii) to Section 15 of the CGST Act 2017, the ld. AAR observed that employers and employees are related persons. Therefore, it is observed that in the instant case since the supplier of the service i.e., the applicant is the employer and the recipients of the said services are employees, they are related persons.

The ld. AAR also observed that when the supplier and the recipients are related parties and the price is not the sole consideration, Section 15(1) of the Act is not relevant. The ld. AAR observed that Section 15(4) of the Act stipulates that in the cases where the value of the supply of goods or services or both cannot be determined under section 15(1), the same shall be determined in such manner as may be prescribed, is applicable in the present case.

The ld. AAR held that the value should be as per Rule 28 read with Rules 30 or 31.

In respect of eligibility to ITC of GST paid on manpower supply the ld. AAR held that services of applicants are covered in the category of services provided in the canteen and other establishments and merit classification under SAC 996333. It is further observed that the said services attract GST @ 5 per cent, without ITC in terms of Notification No. 11/2017-Central Tax (Rate) dated
28th June, 2017, as amended. Therefore, the ld AAR held that the applicant is not entitled to ITC of the GST paid on manpower supply servicesthat are used for providing a canteen facility.

39. Recovery towards Canteen Facility — Liable to GST
Tube Investment of India Ltd. (AR No. 12/2022 in Appl. No. 07/2022-23 dated 24th November, 2022 (Uttarakhand)

In this case, the applicant has submitted facts as under:

“(a) That they are a leading engineering company engaged in the manufacture of precision steel tubes and strips, automotive, industrial chains, car door frames and bicycles. And they have a factory in the state of Uttarakhand where more than 500 workmen (both direct and indirect) are employed.

(b) They have entered into an agreement with the contractors to operate a canteen within the factory premises to provide food to their employees.

(c) They recover a nominal amount from the employees on a monthly basis and such recoveries are shown as a deduction in the monthly slip of the employees.

(d) They do not avail Input Tax Credit (ITC) on the expenses incurred on the services provided by the canteen service provider and are absorbing the GST charged by the canteen service provider as a cost in the books of accounts.

(e) They discharge GST @5 per cent on the cost of the canteen service provider’s total taxable value plus 10 per cent notional markup.”
Based on the above, the ruling was sought on the following questions:

“a. Whether the nominal amount of recoveries made by the Applicant from the employees who are provided food in the factory canteen would be considered as a “Supply” by the applicant under the provisions of Section 7 of Central Goods and Service Tax Act, 2017,

b. In case, the answer to the above is “Yes”, — whether GST is applicable on the amount recovered from the employees for the food provided in the factory canteen or on the amount paid by the Applicant to the Canteen Service Provider?

c. Whether input tax credit (ITC) is available to the Applicant and GST charged by the Canteen Service Providers for providing the catering services of the factory where it is obligatory for the Applicant to provide the same to its employees as mandated under the Factories Act, 1948, even if the answer to question (a) is “No”?

d. Whether Input Tax Credit (ITC) can be availed on GST charged by the Canteen service providers, the answer to the question (b) is “Yes”?”

In the course of the hearing, it was further explained that in compliance with the provisions of the Factories Act, 1948, they provide canteen facilities to employees.

It was also explained that they have entered into an agreement with the contractors to operate a canteen within the factory premises to provide food to their employees and the amount raised by the canteen operator is booked as expenses in the P&L account, without taking the benefit of ITC of the GST paid by them.

It was explained that they recover nominal amounts from the employees on a monthly basis and such recoveries are shown as a deduction in the monthly slip of the employees and the recoveries made are credited to the expense account.

The ld. AAR made reference to the CBIC Press release dated 10th July, 2017, wherein the concept of ‘GST on Gifts’ to employees is clarified. However, in this case, since it is not free, as some amount, though nominal, is collected and also canteen is as per requirement of the Factories Act, 1948.

Regarding further contention that it is not in the course or furtherance of business, the ld. AAR observed that establishing a canteen is in the furtherance of the business of the applicant and supply of food to the employees when the same is not part of the agreement is not an allowance as a part of the employment. Thus, the ld. AAR held that the provision of food in the canteen for a nominal cost is a ‘Supply’ for the purposes of GST and it is a service as per relevant Entry in Schedule II to the CGST Act, 2017.

The further contention of the applicant is that the amount, received from the employees, is in the nature of recovery and not consideration as the recovered amount is directly paid to the third-party vendor without any profit element in the hands of the Applicant, also rejected on the ground that the running of a canteen in the factory of the applicant is in the course of furtherance of business. Though the applicant has chosen to run the canteen through a third party vendor, in the factory, the ld. AAR observed that the provision of a canteen facility and bearing certain costs, in running of canteens are mandated on the part of the employer as per the Factories Act and accordingly, such canteens are in furtherance of business.

Considering the definition of ‘consideration’ in section 2(31) the ld. AAR observed that the applicant supplies food to their employees at a nominal cost, and the same is the consideration for such supply made by the applicant on which GST is liable to be paid. The recovery of cost from the salary as deferred payment does not alter the fact of the service provided and the person providing the said supply observed the ld. AAR.

The issue about ITC also ruled in negative in view of the existing section 17(5)(b)(i), even though it was obligatory to provide canteen under other law.

In respect of the AR of other States, AAR also held them not applicable as each AR is based on its own facts.

[Compiler’s Note: Please also refer to Circular No.172 of 2022 dated 6th July, 2022, in which certain clarifications about blockers of ITC under Section 17(5)(b) are given.]

Service Tax

I. HIGH COURT

21 Commissioner of Central Tax vs. M/s. Singtel Global India Pvt. Ltd.

[2023-TIOL-1155-HC-DEL-ST]

Date of Order: 6th September, 2023

The Telecommunication service provider in India has entered into an Agreement with the foreign telecommunication service provider to provide services to its consumers with all the necessary infrastructure on its own account. The service is not an intermediary service and is an export of service eligible for refund.

FACTS

The Company claimed refund under Rule 5 of the CENVAT Credit Rules, 2004 read with the Place of Provision of Service Rules, 2012 of the unutilised input tax credit of input services used to provide telecommunication services to Singapore Telecommunication Ltd. (SingTel) located in Singapore. The refund was disallowed on the ground that the company is acting as an intermediary and therefore the service does not qualify as export of service. The Tribunal allowed the refund and accordingly, the revenue is on appeal.

HELD

The Court noted that the company is a licensed telecommunication service provider in India that has entered into a contract with SingTel in Singapore to ensure seamless global telecommunication services to its customers registered in Singapore and elsewhere. The company has entered into separate contracts with the telecom operators in India but on its own account and not as in the nature of a broker or agent for SingTel. The agreement envisages that the company has to provide, at its own expense, all necessary infrastructure in order to provide the services. It is further noted that the invoices will be raised in US dollars for the services rendered on a monthly basis and on such transfer prices as may be agreed upon from time to time. Accordingly, the company is not an intermediary and the refund is allowed against the export of services.

II. TRIBUNAL

22 M/s. Bharti Realty Ltd. vs. Commissioner of Service Tax, Delhi – III

[2023-TIOL-838-CESTAT-DEL]

Date of Order: 9th May, 2022

CENVAT credit on inputs, input services and capital goods used for construction of immovable property rented out for commercial purposes is allowable.

FACTS

The Assessee constructed buildings which they rented for commercial purposes and paid service tax under the head of “renting of immovable property service”. CENVAT credit was availed of service tax paid on “input services” and excise duty paid on inputs and capital goods used for construction of the buildings and utilized the same for payment of service tax on the renting service. Notices were issued denying CENVAT credit so availed on the ground that the inputs, input services and capital goods resulted in the creation of immovable property which is neither goods nor services as clarified by the CBEC Circular No. 98/1/2008-ST dated 4th January, 2008 and CBEC Instruction No. 267/11/2010-CX, dated 8th July, 2010 and, therefore, no CENVAT credit is available.

HELD

The Court noted that the immovable property so constructed is a means of providing the taxable service of renting of immovable property. It is not being constructed for its own sake but is being built with the intention of providing taxable service. All the inputs, capital goods and input services are used for the construction of buildings which are then rented out and service tax is paid thereon. Thus, they are entitled to the disputed CENVAT credit.

23 M/s. Sun Microsystems India Pvt. Ltd. vs. Commissioner of Central Excise and Service Tax

[2023-TIOL-844-CESTAT-BANG]

Date of Order: 28th June, 2023

Where marketing services are provided in India as per the direction and instruction of the foreign company and no Agreement entered into with the prospective customers in India, the activities qualify as an export of service.

FACTS

Appellant had entered into a Marketing Service Agreement with M/s. Sun Micro Systems Pvt. Ltd., Singapore for the purpose of marketing / sales promotion, and technical pre-sales support services in India. Notices were issued alleging that the services rendered are classifiable under “Business Auxiliary Services” covered under section 65(19) of the Finance Act, 1994 and do not qualify to be an export service.

HELD

The Court noted that the activity undertaken is canvassing for the products and services of the foreign company which is ultimately used by them for further business. There is no agreement between the prospective customers of the foreign company in India and the appellant. The agreement is only with the foreign company. It is on their request and direction that the marketing activities are carried out in India and it is for these services that they get the consideration in convertible foreign exchange. Thus, the service provided can be considered as an “export of service”.

Goods and Services Tax

I. HIGH COURT

58 M/s KBL SPML 25JV vs. Authority for Advance Ruling, Karnataka GST Bangalore

[2023-TIOL-1146-HC-KAR-GST]

Date of Order: 12th April, 2023

Rejection of Advance Ruling Application without providing an opportunity of a hearing is violative of the principles of natural justice.

FACTS

Application filed seeking Advance Ruling was rejected without being admitted for hearing and without due opportunity to show cause against the reason assigned. The Application was rejected on the grounds of the expiry of the contractual period.

HELD

The Court noted that the opportunity of hearing cannot be an empty formality, and the petitioner should have been informed that the application could be rejected without admission on the ground the corresponding contractual period has expired. It was held that appropriate liberty to file an additional plea to show cause against such reasoning should be provided and the application should be reconsidered.

59 Gobinda Construction vs. Union of India

[2023-TIOL-1178-HC-PATNA-GST]

Date of Order: 8th September, 2023

The availment of Input Tax credit is not an unconditional right and can be availed only when the conditions to take it are fulfilled.

FACTS

Petitioners challenged the constitutional validity of section 16(4) of the CGST Act, 2017 which denies entitlement of Input Tax Credit after a certain period, and contended that the same is violative of Articles 14 and 300A of the Constitution of India. Alternatively, the petitioners sought a declaration that the conditions as prescribed in section 16(4) are merely procedural in nature, and cannot override the substantive conditions for availing credit prescribed under section 16(1) and section 16(2) of the said Act. Also, GSTR-3B cannot be treated to be a return, as it does not satisfy the parameters of a return contemplated under section 39(1) of the said Act. They also sought a declaration that Rule 61(5) of the CGST Rules, 2017, as amended retrospectively prescribing Form GSTR-3B as a return under Section 39(1) of the CGST Act is ultra vires section 39(1) of the CGST Act itself.

HELD

There is no gain saying that language of section 16(4) of the CGST / BGST Act, is plain and unambiguous. The doctrine of reading down applies only when general words used in a statute or regulation should be construed in a particular manner so as to save its constitutionality. The language of section 16 of the CGST / BGST Act suffers from no ambiguity. It clearly stipulates grant of credit subject to the conditions and restrictions put thereunder. A registered person becomes entitled to credit only if the requisite conditions stipulated therein are fulfilled, and the restrictions contemplated under sub-section (2) of section 16 do not apply. The right of a registered person to take credit under subsection (1) of section 16 of the Act becomes a vested right only if the conditions to take it are fulfilled, free of restrictions prescribed under subsection (2) thereof. The provision under sub-section (4) is one of the conditions which makes a registered person entitled to take credit and by no means it is violative of Article 300-A of the Constitution of India.

60 Oasis Realty vs. Commissioner of Sales Tax

[2023-TIOL-1153-HC-MUM-VAT]

Date of Order: 26th July, 2023

Once the composition scheme is opted, the set-off on purchases is not permissible.

FACTS

The assessee is an Association of Persons, and is engaged in the business of construction, development and sale of immovable property. As part of its business, they have constructed various apartments / buildings / flats and transferred the same under written agreements to buyers along with the underlying land or the interest in such land. For the purpose of payment of VAT, the Scheme of Composition notified under Section 42(3A) of the MVAT Act vide Notification No. VAT 1510/CR-65/Taxation is opted. The said Scheme was opted for agreements in respect of the sale of flats which were registered during the year 2013-14 and was to be the basis on which VAT was to be paid in respect of the construction of such flats. They were purchasing three types of materials i.e., the material which is required in construction activity, purchases for office consumption and purchases at the site. It was contended that the said Notification was issued in respect of the discharge of liability on goods getting transferred in the construction contract and therefore the scope was restricted in relation to goods which were liable to tax. It further contended that since the aforesaid second and third category purchases were of goods that were not transferred, the said Notification was not applicable for such category of purchases, and therefore the assessee would be entitled to claim setoff of tax paid in respect of said purchases. The said set-off was rejected and it was contended that all purchases in respect of flat construction were not eligible for set-off.

HELD

As per the Composition Scheme notified by the said Notification dated 9th July, 2010, the composition amount is one percent of the agreement amount specified in the agreement or the value specified for the purpose of the stamp duty in respect of the said agreement under Bombay Stamp Act, 1958, whichever is higher. Thus the Scheme provides for tax at a flat rate of one percent. However, Condition No.3 provides that a dealer who opts to pay composition under the said Scheme shall not be eligible to claim set-off of taxes paid in respect of the purchases. The whole purpose of such a Composition Scheme is to provide for a convenient, hassle-free and simple method of assessment and if the credit of selective purchases is allowed the purpose is wholly defeated. The Appeal is accordingly dismissed.

61 Xilinx India Technology Services Pvt Ltd vs. The Special Commissioner Zone VIII & ANR

[2023-TIOL-1164-HC-DEL-GST]

Date of Order: 1st September, 2023

Subsidiary and Holding companies are separate establishments not covered by section 2(6)(v) of the IGST Act.

FACTS

The application for refund of IGST was rejected on the ground that the petitioner and its holding company are establishments of a single person and, therefore, the services provided to its holding company did not constitute an export of services within the meaning of section 2(6) of the IGST Act.

HELD

The petitioner is a separate entity and it is a settled law that the identity of an incorporated company is separate from that of its shareholders. Services rendered by a subsidiary of a foreign company to its holding are not covered under section 2(6)(v) of the IGST Act and the same is beyond any pale of controversy in view of the Circular dated 20th September, 2021 issued by the CBIC. The services are provided on a principal-to-principal basis. The services provided are on their own count and not facilitated by the provision of services from any third-party services provider. Respondents are directed to forthwith process the refund along with interest.

Part B : Some Recent Judgments

I. High Court :

1. CENVAT Credit  :

Non-alcoholic beverage manufacturers of concentrates whether are eligible to avail credit of service tax paid on advertisement, sales promotion, market research and utilise the same against duty liability on the concentrates is the issue involved.

Coca Cola India (P) Ltd. v. CCE, 2009 (22) SIT 130 (Bom.) (HC)

The credit was denied on the ground that advertisements did not relate to concentrates manufactured by the appellant although advertisement expenses formed part of the sale price of the said concentrates manufactured by the appellant. The appellant contended that the advertisement of the brand name with a soft drink had direct relationship with the manufacture of concentrate inasmuch as the demand and consequently, the production of concentrate depended on the consumption of the soft drink and that the advertisement enhanced the market-ability of the concentrate. It was also pleaded by the intervener in the case that service tax like CENVAT was a consumption tax, which had to be borne by the consumer. There was an integral link between the concentrate manufactured by the appellant and the beverage viz. aerated water manufactured by the bottler from it. In this context, the definition of ‘input service’ was analysed in great detail. Further, the Supreme Court’s decision in the case of Bombay Tyres International, 1983 (14) ELT 1896 (SC) was discussed at length. In this case, the Supreme Court held that even though the levy was on the manufacturer, the measure could be with reference to the sale price. Accordingly, it was held that the expense for marketability and selling including advertisement and publicity would form part of the value of goods under assessment. It was also contended by the appellant that revenue never disputed that advertisement of aerated water was an activity related to manufacture and sale of concentrate and that cost of advertisement was relatable to aerated water which formed part of the value of concentrate in the hands of its manufacturer and therefore, it was included in the sale price of concentrate charged by the manufacturer. In this background, the terms ‘means’, includes’, ‘such as’ and ‘business’ used in the definition of ‘input service’ were extensively analysed with reference to several Supreme Court and Larger Bench decisions which inter alia included the following:

Pepsi Foods Ltd. v. CCE, 2003 (158) ELT 552 (SC)

Bharat Co-op. Bank (Mumbai) Ltd. v. Co-op. Bank Employees Union, (2007) 4 SCC 685

Good Year India Ltd. v. Collector of Customs, 1997 I.(95) ELT 450

Doypack Systems (P) Ltd. v. UOI, 1988 (36) ELT (SC).

In summation, what followed from the discussion was that credit was availed on the tax paid on the Input service, which was advertisement and not the contents of the advertisement. Thus, it was observed that it was not necessary that the advertisement must relate to the final product manufactured by the person advertising. So long as the manufacturer can prove that the advertisement services used had an impact on the manufacture of the final product, he could avail the credit of the service tax paid by him. The correlation between the soft drink and the concentrate being direct and proportionate, the advertisement indirectly enhanced the marketability of the concentrate. Once the cost incurred for service was added to the cost assessed, the nexus of the cost of the advertisement service was established with the manufacture of the final product. As such, the expression ‘input service’ was capable of covering indirect use in or in relation to the manufacture of the final product and accordingly, CENVAT credit was available to the manufacturer for payment of duty.

2. Import of service:

Unitech Ltd. v. CST, 2009 (15) STR 385 (Delhi)

The High Court agreed with the issue settled by the Bombay High Court in the case of Indian National Shipowners Association v. UOI, 2009 (13) STR 235 (Bom.) and held that the Revenue could collect tax only upon being invested with due legal authority, an event which occurred only on insertion of S. 66A on 18-4-2006 and as such, the demand confirmed by Tribunal from recipient of taxable service of foreign architect for the period 1-1-2005 till 15-6-2005 was held as done without authority of law and accordingly answered the question of law.

3.Penalty: Power of Commissioner (Appeals) to reduce:

CCE v. Madhuri  Travels, 2009 (15) STR 241 (Bom.)

The short question before the Tribunal was, to examine whether minimum penalty prescribed u/ s.76 could be reduced by Commissioner (Appeals). The Court ruled that considering S. 80 of the Finance Act, 1994 the authority was vested with the power not to impose penalty or reduce the same and matter being covered in the order of the Court in the case of CCE&C Nashik v. D. R. Gade, 2008 (9) STR 348 (Bom.), revenue’s appeal was dismissed.

II. Tribunal:

4.(a) Appeals: Hearing without pre-deposit when divergent views prevail :

SRC Projects P. Ltd. v. CCE, 2009 (15) STR 463 (Tri.-Chennai)

In the instant case, the appellant adjusted excess service tax paid against later liability. The original authority relied on the Single Member Tribunal’s decision of Nelson Org. Mang. P. Ltd. V. CCE, Delhi 2006 (3) STR 503 (Tri.-Del). However, various other decisions including the one in the case of Nima Architect and Valuers V. CCE, 2006 (1) STR 305 (Tri.-Del) decided that excess payment of service tax could be adjusted against later liability of service tax. The Commissioner (Appeals) dismissed the appeal as payment of pre-deposit ordered was not complied with. The Tribunal remanded the matter for fresh decision with a direction that the matter be heard without insisting on pre-deposit in the circumstances when divergent views were held in various Tribunal decisions.

b) Pre-deposit not insisted if tax paid with interest:

    K. Fasteners V. Commissioner of Central Excise, Salem 2009 (15) STR 330 (Tri.-Chennai)
 
The appellant assembled items supplied by its principal. Service tax was demanded under ‘business auxiliary service’ and applicable interest and penalties were levied. The appellant contended the activity as manufacturing yet paid service tax with interest before issuance of Show Cause Notice. The appellant’s appeal before the Commissioner (Appeals) was rejected for non-payment of pre-deposit insisted on penalty amount for considering the appeal. While hearing the stay application, appeal itself was taken up by the Tribunal and the matter was remanded to the Commissioner (Appeals) directing that the appeal be heard without pre-deposit as usually when tax is paid with interest, pre-deposit should not be insisted upon.

5. CENVAT Credit :

a) Service tax on construction of compound wall – an input service:

In re: Raymond Zambaiti P. Ltd., 2009 (15) STR 596 (Commr. App)

Appellant availed service tax paid on construction service of compound wall of the factory. CENVAT credit was disallowed on the ground that it was neither used directly for ‘manufacture’ of excisable goods nor for any output service. The appellant contended that the compound w311was part of the factory. Reliance was placed on Apex Court’s decision in the case of South Eastern Coalfields Ltd. V. CCE, 2006 (200) ELT 357 (SC) and according to which ‘precinct’ had to be given broader meaning to include the surrounding area. It was further observed that the definition of ‘input service’ included services used in relation to setting up, modernisation, renovation or repairs of factory and no factory could function without a compound wall to take care of security, environmental protection etc., the construction of compound wall would be input service within the meaning of its inclusive definition and as such, CENVAT credit was considered allowable.

b) Security agency service used for factory admissible:
CCE&C Guntur V. Hindustan Coco-Cola Beverages P. Ltd., 2009 (15) STR 248 (Tri. Bang.)

Services of security agency at the depot and services of pest busters were used in the manufacturing activity of food products for human consumption. The former service used to prevent theft and the latter from contamination were found eligible for CENVAT credit by Commissioner (Appeals) after detailed analysis of ‘input service’ and following precedent of DCM Shriram Consolidated Ltd., 2006 (4) STR 610 (Comrnr. Appl.) Finding no infirmity in the order, plea of department for stay of order was rejected.

c) Substantive benefit not denied on procedural ground:

C&CCE. Vapi  v.  DNH Spinners, 2009 TIOL  1216 CESTAT-AHM

The assessee received invoices from vendors in the name of head office instead of factory. Based on the decisions in the case of Eveready Industries India Ltd., 2007 (219)ELT 333 and Tisco Ltd., 2008 (228) ELT 224, it was held that when the invoices received by head office/registered office were endorsed by the appellant, substantive benefit could not be denied on procedural ground. Incidentally, the appellant being only manufacturing unit, the head office could not be considered as input service distributor and the denial was dismissed.

6. Import  of Service:

a) Limitation: Plea justified when clarity in law is absent:
Ashok Leyland Ltd. v. CCE&ST, LTU Chennai, 2009 (15) STR 289 (Tri. Chennai)

The appellant paid commission to foreign parties during 2004-05 and 2005-06 till October 30, 2005. This was covered as Business Auxiliary Service. However, service was exempt till 9-7-2004 under Notification No. 8/04-ST until it was restricted to services of commission agents relating to agricul-tural produce. The appellant had a bonafide belief as to non-taxability under reverse charge until the introduction of S. 66A on 18-4-2006. Several deci-sions were cited. which inter alia included ‘ Sterlite Industries (India) Ltd. v. CCE, 2008 (11) STR 375), Lohia Strangler v. CCE, 2008 (10) STR 483 (Tri.-Del), Foster Wheeler Energy Ltd. v. CCE, 2007 (7) STR 443. The Tribunal also took a note of the Larger Bench’s decision in the case of Hindustan Zinc Ltd. v. CCE, 2008 (11) STR 338 (Tri.-LB) and distinguished Apex Court’s decision in the case of Kerala State Electricity Board (KSEB) v. CCE, 2008 (9) STR 3 (SC) cited by the department. The Tribunal found force in the limitation plea as no clarity existed in law at material time as to the issue of applicability of reverse charge provision. It accepted bonafide belief in non-taxability and provided waiver of pre-deposit as part payment was made by the appellant prior to the issuance of Show cause Notice.
 
(b)(i) Import of service (ii) operational assistance for export considered BSS :

Fifth Avenue  v. CST, 2009 (15) STR (Tri.-Chennai)

Service tax was paid by the appellant for the period April 2006 to September 2006 being receiver of operational assistance for execution of export orders to whom payment was made in foreign exchange. Issue involved was two fold: Appellant pleaded to consider the service of operational assistance for export orders as business support service and not business auxiliary service and secondly application of reverse charge was also contended to be applicable only from 18-4-2006 relying on the Bombay High Court’s decision in the case of Indian National Shipowners Association v. UOI, 2009 (13) STR 235 (Bom). Appellant succeeded on merits on both the pleas and therefore, service tax demand for the period prior to 1-5-2005 was set aside.

c. Bathija International v. Commissioner of Central Excise, Salem 2009 (15) STR 249 (Tri. Chennai)

Appellant, an exporter, paid commission to agents abroad. Service tax was demanded under ‘Business Auxiliary Service’ and applicable interest and pen-alties were imposed for the period 12-8-2004 to 27-9-2006. Appellant contended that there being no li-ability prior to introduction of S. 66A on 18-4-2006 and the liability for the subsequent period already having been paid by them, plea was made for remand without further pre-deposit. The matter was remanded without pre-deposit.

7. Refund:    Admissible based  on credit notes:

Professional International Couriers Pvt. Ltd. v. CST, 2009 (15) STR 295 (Tri.-Chennai).

Appellant being co-loader for a courier agency was not required to pay service tax as per Board’s Circular, however inadvertently paid service tax after collecting the same from the principal courier agency and claimed refund. The principal agency was returned the so-collected service tax by way of credit note. The principal agency even reversed the credit taken by them for service tax so paid to the appellant. Relying on the ratio of decision in the case of Shiva Analyticals (I) Ltd. v. CST, 2007 (7) STR 35 (Tri.-Bang.), it was held that in the circumstances when service tax erroneously collected was returned to the customer whether by cheque or by issuing credit note and the fact supported by chartered accountant’s certificate, there being no unjust enrichment,  the refund    was  held  as admissible.

8. Valuation:  Benefit of Notification  No. 12/ 2003 to caterer’s  service:

a. Grand Ashok v. CST, 2009 (15) STR 344 (Tri.-Bang.)

The appellant, an in-flight caterer was called upon to pay service tax on the gross amount of their bill, which included supply of goods and beverages on which VAT was paid. Service tax was paid on handling and transportation. Decision of Imagic Creative P. Ltd. v. CCT, 2008 (9) STR 337 (SC) was discussed at length and relied upon. Apex Court’s decision in case of Bharat Sanchar Nigam Ltd. v. UOI, 2006 (2) STR 161 (SC) also was relied upon and it was held that service tax was liable to be paid on outdoor caterer’s service. However on sale of goods, since VAT was paid, service tax could not be levied and the appellant was entitled to benefit under Notification No. 12/2003-ST. Further, appellant being under bonafide belief, longer period of limitation was not invokable.

b. On a similar issue in the case of LSG Sky Chefs (India) Pvt. Ltd. v. CST, 2009 (15) STR 545 (Tri.-Bang.), it was held that sales tax and service tax being mutually exclusive and separate invoices having been issued for supplies of goods, service tax could not be imposed on the portion of the contract on which VAT was paid.

c) Pre-deposit waived: Cost of goods in construction service:

M/s. Sobha Developers Ltd. v. CST, Bangalore 2009 TIOL 1176 CESTAT-Bang.

In case of residential consumption service, the appellant paid service tax on 30% of the contract and VAT was paid on the balance 70% representing value of goods and material. Relying on the same Bench’s final order No. 24/2009 dated 16-1-2009 in case of M/s. LSG Sky Chefs (India) Pvt. Ltd. (supra) and in the case of Wipro GE Medical System Pvt. Ltd., 2008 TIOL 2476 CESTAT-Bang., it was observed that the Board also has issued circular to the effect that the appellant is not liable to pay service tax and the appellant had a strong case of merits based on the fact that where sales tax is paid, service tax would not be demanded and the balance remaining unpaid pre-deposit was waived.

Part B : Some Recent Judgments

I. Supreme Court:

1. Classification:

Marine Logistic Services to Offshore Support Vessels from 1-6-2007 to 15-5-2008 whether could be held as services in relation to mining ?

Union of India v. Indian National Shipowners Association, 2011 (21) STR 3 (SC)

The short question involved in the case relates to the classification i.e., whether the services provided by members of the Association could be covered as services in relation to mining of mineral, oil or gas as provided in section 65(105)(zzzy) of the Finance Act, 1994 (the Act) introduced with effect from 1-6-2007. The Association contended that they were appropriately covered by the provisions of section 65(105)(zzzz) of the Act dealing with supply of tangible goods for hire. This service was introduced from 16-5-2008. The members of the Association provided vessels to ONGC on time-charter basis for the period in question viz. 1-6-2007 to 15-5-2008. The scope of the work in addition also included services such as carrying men and material between base and offshore installation, carrying out routine surveillance in offshore, carrying out rescue operations if and when required and carrying out any other field work which would be within the capability of the chartered vessels. Earlier the High Court held that the nature of work carried out by the members of the respondent could not be said to be the work in relation to mining activity. The Supreme Court also found that none of the activities mentioned in the agreement with ONGC by one of the members could be said to be a service rendered in relation to mining of mineral, oil or gas. Therefore, it affirmed the order of the High Court looking into facts in issues only and left the question of law decided by the High Court, open to be considered at length in appropriate case.

2. Commercial training or coaching services:

Whether computer training institutes were exempt between 10-9-2004 and 15-6-2005?

Commissioner of C.Ex. v. Sunwin Technosolution P. Ltd., 2011 (21) STR 97 (SC)

The Department challenged the judgment of the Jharkhand High Court holding that service tax was not payable by the computer training institutes for the impugned period.

Initially a Notification dated 20th June, 2003 was issued providing exemption to vocational training institutes including computer training institutes. However, the said Notification was effective till 30th June, 2004. Later a new Notification dated 10th September, 2004 was issued, which exempted vocational training institute and recreational training institute from the levy of service tax but did not specifically cover computer training institutes. This Notification, however, was amended by Notification dated 7th June, 2005 (effective from 16th June, 2005), which specifically excluded computer training institutes from the scope of the exemption. Therefore, according to the respondent since the amendment in Notification dated 10th September, 2004 was made effective from June 16, 2005, it implied that computer training institutes stood exempted for the impugned period of 2004-2005 and the liability would arise only from 16th June, 2005.

The Department contended that the Government was fully conscious of the fact that computer training institutes were not to get exemption and the same was clear because these were excluded from the Notification dated 10th September, 2004 and Notification dated 7th June, 2005 was more or less in the nature of clarification. The Apex Court confirmed that since computer training institutes were was out of the scope of exemption from 10-9-2004, the liability existed for the impugned period.

II. High Court:

3. CENVAT credit:

Does Cenvat credit of service tax on input services need to be reversed when inputs are removed?

Commissioner of C.Ex., Chandigarh v. Punjab Steels, 2011 (21) STR 5 (P & H)

The respondent, a manufacturer removed certain inputs from the factory without being used. The respondent did not reverse the CENVAT credit of service tax paid on input service (i.e., Goods Transport Service) so received in relation to purchase of inputs, as no provisions exist in the Rules in this regard. The Tribunal passed an order favouring the respondent. The Revenue filed an appeal raising a question of law whether CENVAT credit availed on input service at the time of receipt of inputs is required to be reversed at the time of clearance of inputs. The Revenue referred to Rule 3(5) of the CENVAT Credit Rules, 2004 (CCR) which specifies that Cenvat credit taken on inputs or capital goods needs to be reversed when the inputs are removed as such from the factory and contended that the respondent was required to reverse the CENVAT credit even of service tax on input services. Further, the Revenue also relied on Rule 5 of CCR which provides that CENVAT credit on inputs or input services is required to be reversed when the assessee is entitled to refund of tax paid on inputs or input services.

The respondent contended that there exists a material difference in language used in Rule 3 and Rule 5 of CCR. Rule 3 provides for reversal of credit on inputs or capital goods and Rule 5 refers to reversal of credit on inputs or input services. Further, inputs and input service are separately defined under CCR. The Revenue cannot direct respondents to reverse the credit on input service merely on analogy. The Court held that Rule 5 on which reliance was placed by the Revenue, stood on different footing. There being no specific provision for reversal of CENVAT credit on service tax paid on input service, such a proposal was not in accordance with the law. Hence, the appeal by the Department was dismissed holding that there did not exist substantial question of law and tax could not be levied merely by inference.

4. Penalty:

Can penalty u/s.76 of the Finance Act, 1994 be reduced below the minimum prescribed limit?

Commissioner of C.Ex. and Customs v. S. J. Mehta & Co., 2011 (21) STR (Guj.)

The respondents paid service tax along with interest after the due date of payment. They also filed a belated service tax return. Due to the lapses, penalty of Rs.88,800 u/s.76 of the Act was imposed. The respondents in the appeal got the penalty amount reduced to Rs.25,000 on invocation of section 80 of the Act. The Revenue’s appeal was rejected by the Tribunal.

Reliance was placed on a similar case reported at 2010 (19) STR 641 (Guj.) where the High Court quashed the order of the Tribunal. Apart from this, on a conjoint reading of section 76 and section 80 of the Act, the High Court had taken the view that there exists no discretion to the authority for levying a penalty below the minimum prescribed limit. Following this decision, the order of the Tribunal was set aside and the issue was divided to be looked at afresh by the Tribunal.

III. Tribunal :

5. Business Auxiliary Service:

Whether promotion of logo or branding service could be held as ‘Business Auxiliary Service’?

Jetlite (India) Ltd. v. Commr. of C.Ex., New Delhi 2011 (21) STR 119 (Tri.-Delhi)

In the year 2003 to 2007 (hereinafter called as the ‘relevant period’) Sahara Airlines used the logo and advertisement of its group company Sahara India Commercial Corporation Ltd. on its stationary and tickets. The Tax Department claimed that display of information of construction projects of Sahara India Commercial Corporation on boarding passes and baggage tags amounted to advertising and consequently a business auxiliary service and thus demanded a huge sum as liability to tax form Jetlite which had taken over Sahara Airlines.

The contentions of the appellant were as under:

  •     The appellant merely displayed logo of the group companies and were a part of the said group and were not rendering any service to Sahara Corporation. No other activity was carried out by them.

  •     The activities did not relate to any service as such rendered by Sahara Corporation to its customers and hence the appellant could not have been charged of having rendered service in the nature of business auxiliary services.

  •     Services of ‘brand promotion’ and ‘sale of space’ have been introduced in the said Act subsequent to the relevant period and hence the appellants could not be held to have rendered such service.

  •     Activity of the construction and sale of immovable property does not amount to service and promotion of immovable property is not covered within the definition of ‘business auxiliary service’.

  •     Not a single document on record suggested that the appellants had promoted or marketed any service of Sahara Corporation, i.e., the appellants did not carry out advertising activity for the projects of Sahara Corporation.

  •     The sale of immovable property by Sahara Corporation could not be deemed to be service for the relevant period as Sahara Corporation constructed building for themselves and not for others. Further, letter dated 10-9-2004 of the Ministry of Finance, clarified that the builder constructing for himself did not render any service as such.

The submissions of the Department were as under:

  •     Resolution by Sahara Corporation revealed that they had decided to use the services of the appellants for promoting their business and in consideration of which, the appellants were to receive certain amount per passenger.

  •     Merely because end product is transferred by way of sale, that will not wipe out the effect of services rendered by Sahara Corporation.

  •     Subject-matter of sale being that property constructed comprised various services to make the premises ready for sale.

  •     If the interpretation of the appellants was to be accepted, it would defeat the very provision of law.

Rejecting the demand of the Department, the Tribunal held as under:

  •     Mere printing of logo or the promotion of a brand without reference to any particular service provided by the client was not covered under BAS (Business Auxiliary Service).

  •     The service of brand promotion is brought in as a separate taxable service by the Finance Act, 2010 with effect from 1-7-2010 and before this date, brand promotion activity was not taxable under BAS.

  •     Construction of immovable property on its own behalf and its sale does not constitute a service and therefore, even if such activities were promoted, it did not amount to ‘promotion or marketing of service provided by the client’. Furthermore, Memorandum or Articles of Association is not sufficient to establish that there was service for promotion or marketing provided. Similarly, relying on registration certificate, one cannot conclude about the liability to service tax. The Department has to place on record factual matrix which would disclose basic information, which would enlighten as to the activity of the firm.

  •     The adjudication order went beyond the show-cause notice in confirming the demand by referring to various activities that Sahara Group carried on that were not alleged in the show-cause notice.

  •     The onus to establish classification and taxability was on the department was not discharged by the Department.

Hence, the appeal was allowed holding that the appellant’s service could not be taxed as Business Auxiliary Service.

6. CENVAT credit:

a) Whether input service used for outward transportation is eligible for benefit as CENVAT credit?

Somaiya Organo Chemicals v. Commr. of C.Ex. & Cus., Aurangabad 2011 (21) STR 114 (Tri.-Mumbai)

The appellant paid service tax on the insurance policy in respect of goods transported from the factory to the port of export.

In case of export of goods, it has been held that input service includes services rendered for outward transportation upto place of removal of goods and service tax paid to facilitate goods to reach the place of removal has to be eligible for benefit of CENVAT credit. Insurance service was taken by the appellant for transportation of goods from the factory to the port of export. Thus, input service was used for the business activity undertaken up to the place of removal of goods. The Tribunal held that the appellant was entitled to take input service credit.

b) Is Cenvat credit available on air-ticket booking service for paying excise duty on manufacture of final products ?

Somaiya Organo Chemicals v. Commr. of C.Ex. & Cus., Aurangabad 2011 (21) STR 114 (Tri.-Mumbai)

The respondent was engaged in the activity of manufacture. Various air journeys were undertaken by employees for business purpose.

Revenue in appeal claimed that air-ticket booking service was not an input service as there was no nexus between air-ticket booking service and manufacturing activity. The respondent con-tended that ‘the object of CENVAT scheme is to allow credit on inputs used in or in relation to manufacture of final product and to allow credit on input services used in or in relation to manufacture of final product as well as in relation to business of manufacture’. Business activity cannot be restricted to mere manufacturing activity and it covers all activities that are related to business. The term ‘in relation to business’ cannot be given a restricted meaning and expenses incurred as a result of commercial expediency are covered by the said term. The appeal was allowed.

7. Commercial or Industrial Construction service:

Whether laying of pipeline covered as ‘Commercial or Industrial Construction service ?

Dinesh Chandra Agarwal Infracon P. Ltd. v. Commissioner of Central Excise, Ahmedabad 2011 (21) STR 41 (Tri.-Ahmd.)

The appellant provided service of laying of long-distance pipelines for the transfer of water in the State of Gujarat under a contract with the Gujarat State’s Sewerage Board, an independent body constituted under an Act of the State Government.

The Tribunal observed that service tax would be payable under the service head, ‘Commercial or Industrial Construction Service’ only if the service was provided to any person by a commercial concern and in relation to commercial or industrial construction service.

The appellant did satisfy the first condition mentioned above; however the second condition was not very certain. ‘Commercial or Industrial Construction Service’ was chargeable to service tax if it was used for the furtherance of business or commerce. As the canal built by the Government was not falling under commercial activity, service tax was held to be not chargeable.

Water purchased by the Board was distributed to rural and urban areas for the purpose of irrigation and drinking at subsidised rates and the operating cost was also not recovered by them. To set up an establishment for water supply was a part of the duties and functions of the State to provide its citizens with a better living. Accordingly, the services provided were held to be not covered as commercial or industrial construction service and therefore the appeal was allowed.

8. Penalty:

Should penalty be leviable in case service tax is paid along with interest after issuance of show-cause notice?

Rockwool Insulation v. CCE, Rajkot 2011 (21) STR 62 (Tri.-Ahmd.)

The appellant engaged in providing construction services paid service tax after the due date along with interest. However, part payment of service tax was made by the appellant after the issuance of show-cause notice (SCN). Penalty was levied on the appellant for non-payment of service tax along with interest.

Further, the appellant also collected service tax from their customers and admitted that the service tax was not paid because of financial difficulty. Thus, having regard to collection of service tax and non -payment, penalty was considered warranted and the case was remanded for re-determination of penalty imposable.

9. Principles of natural justice:

Show-cause notice issued by the revisionary authority violating the principles of natural justice.

Klockner Desma Machinery Pvt Ltd v. CST, Ahmedabad 2011 (21) STR 37 (Tri.-Ahmd.)

In the present case the demand of service tax raised against the appellant was initially dropped by the Assistant Commissioner and then taken for review by the Commissioner. Show-cause notice was issued by the Commissioner on 13-1-2010 requiring the appellant to file reply within seven days of receipt of notice and appear for personal hearing on 20th, 21st or 22nd January. The appellant applied for an extension of time to reply on 18-1-2010. There was no reference in the impugned order to said reply of the assessee. It was held that a period of seven days granted to the assessee to file a reply and personal hearing on three consecutive days in accordance with the principles of natural justice. The matter was remanded to the Adjudicating Authority for fresh decision observing principles of natural justice.

10. Rebate : Export of services:

Whether non-filing of prior declaration leads to rejection of rebate claim?

Manubhai & Co. v. CST, Ahmedabad 2011 (21) STR 65 (Tri.-Ahmd.)

The appellant claimed refund under Notification No. 12/2005-ST being service tax paid on input services used in services exported by them. The said Notification provides for filing of declaration describing the quantity, value, rate of duty, amount of tax payable on inputs, value and amount of service tax and cess payable on input services prior to the date of export. The Authority was of the opinion that the assessee could not claim refund on the ground that the appellant had not filed of non-filing declaration before export. It was further held that the notification is divided into two parts. The first part gives conditions to be fulfilled for granting of refund and the second part gives the procedures to be followed and that the requirement of a declaration in the Notification cannot be treated as a mere procedural requirement.

The appellant argued that substantive benefit can-not be denied on the ground of procedural lapses. The Tribunal held that failure to file declaration is not sufficient to hold that the assessee did not pay service tax on input services. Non-observance of a procedural condition was of a technical nature and cannot be used to deny the substantive concession.

11. Refund:

Whether refund is allowable when service tax is paid in case when the assessee fails to take benefit of small scale exemption?

Cancio E.P. Mascarenhas v. CCEx., Goa 2011 (21) STR 17 (Tri.-Mumbai)

Notification 6/2005 provided for threshold exemption of service tax on taxable services of the value not exceeding Rs.8 lakh to a service provider in the relevant year. The appellant did not know about this benefit and paid service tax on commission received from his client. On becoming aware, the appellant filed a refund claim of service tax paid by them. However, it was rejected on the ground that the appellant had not exercised the option for claiming the benefit of threshold exemption Notification. Departmental authorities submitted that the appellant paid tax by fulfilling the condition 2(1) of the said Notification which says that a service provider can opt to pay service tax and not avail the benefit of exemption, but the option once exercised shall not be withdrawn during the remaining part of the year. In this regard the assessee contended that the benefit of exemption Notification was available in any financial year subject to fulfilment of conditions specified in the Notification. The assessee could not take the decision in advance as he got registered in November 2007 and could not opt for exemption during the financial year. Hence, condition of 2(1) of the said Notification was not applicable to the appellant. Apart from this, the appellant also did not recover service tax from clients and paid service tax as an honest taxpayer. The appeal was allowed and the refund was allowed.

Recent Developments in GST

A. NOTIFICATIONS

1. The Government has issued a notification bearing no. S.O.4073(E) dated 14th September, 2023, by which the constitution of State Benches of GST Appellate Tribunal are notified.

2. Notification No. 46/2023-Central Tax dated 18th September, 2023

The above notification seeks to appoint a common adjudicating authority in respect of show cause notice/s issued in favour of M/s Inkuat Infrasol Pvt. Ltd.

3. Notification No. 47/2023-Central Tax dated 25th September, 2023

By the above notification, the amendment is made in notification no. 30/2023-CT, dated 31st July, 2023. By notification no. 30/2023, special procedure is prescribed in respect of products specified in Schedule to the said notification, like Pan Masala, etc. By the above amendment notification, the effective date for the implication of notification no. 30/2023 is specified as 1st January, 2024.

4. Notification No. 48/2023-Central Tax dated 29th September, 2023

By the above notification, the provisions of the Central Goods and Services Tax (Amendment) Act, 2023 (30 of 2023) are notified to be effective from 1st October, 2023. The Amendment Act is related to taxation schemes for online gaming.

5. Notification No. 49/2023-Central Tax dated 29th September, 2023

By the above notification, supplies falling under online gaming are notified under the powers conferred under section 15(5) of the CGST Act.

6. Notification No. 50/2023-Central Tax dated 29th September, 2023

By the above notification, consequential changes are made in relation to composition levy u/s.10 to make reference to the supply of specified actionable claims.

7. Notification No. 51/2023-Central Tax dated 29th September, 2023

By the above notification, certain amendments are made to the CGST Rules, 2017. The changes are related to PAN for registration, online money gaming, value of supply in case of online gaming, value of supply of actionable claim, submission of returns by persons providing OIDAR services, etc.

Notifications relating to Rate of Tax

8. Notification No. 11/2023-Central Tax (Rate) dated 29th September, 2023

By the above notification, rate of tax is provided in relation to “specified actionable claim”, like betting etc., by amending Schedule IV in Notification No 01/2017-Central Tax (Rate) dated 28th June, 2017. Because of the above amendment, the rate becomes 28 per cent on the specified actionable claims.

Notifications under IGST

9. Consequent to making the online money gaming, etc., taxable, appropriate notifications are issued under the IGST Act for implementation of the said taxation scheme under IGST. Notifications are from no. 2/2023-Integrated Tax dated 29th September, 2023, to No. 4/2023 and also from notification no. 11/2023-Integrated Tax (Rates) to No.13/2023 all dated 26th September, 2023, and also no. 14/2023 dated 29th September, 2023.

B. ADVISORY

a) The GSTN has issued an Advisory dated 13th September, 2023, regarding the Time limit for reporting Invoices on the IRP Portal.

b) The GSTN has further issued an Advisory dated 19th September, 2023, which is regarding geocoding functionality for the “Additional Place of Business”.

c) There is also an advisory dated 27th September, 2023, about Temporary / Short Period pause in e-invoice auto population into GSTR-1.

d) By advisory dated 3rd October, 2023, the information is given by GSTN that the e-Invoice JSON download functionality is now live on the GST Portal.

d) By advisory dated 6th October, 2023, the GSTN has further informed in respect of the introduction of compliance pertaining to DRC-01C.

C. ADVANCE RULINGS

40 Classification of Service — Export of Service

Testmesures Spherea Solutions Pvt. Ltd. (AR No. KAR-ADRG-46/2022 dated 2nd December, 2022 (Karnataka))

The applicant Testmesures Spherea Solutions Private Limited (referred to as “Spherea India”) is a Private Limited Company registered under the provisions of CGST/KGST Act 2017 and is a wholly owned subsidiary of Spherea Test & Services, France (referred to as “Parent Company”). The Parent Company sold two equipments (Test benches for aeronautics cases) to their customer in India, and the said equipments are currently with the Indian Air Force (IAF) at their operational forward bases. The Parent Company has subcontracted certain services to the applicant with respect to the test benches (also referred to as the Mermoz system).

It was explained that test benches are used to test and prove the airworthiness of the aircraft’s equipment. Also, on detection of any errors, the test benches are used for determination and correction of the errors which will ensure the safe flight of these aircrafts. In this regard, Spherea India shall provide a set of services with respect to the test benches specified as under:

i. Write incident reports on the Test benches.

ii. Support customers to investigate problems appearing in Test benches, perform periodic verifications, maintenance of test benches.

iii. Install new software on the test benches.

iv. Assist customers in daily operation of test benches, analyse the test results reports.

v. Provide advice to the customer.

vi. Generate monthly reports, activities summary and set up and manage meetings based on these reports.

The applicant is to raise an invoice on the Parent Company for the set of activities performed, since Spherea India does not have direct contact with the Indian customer. Payment against such invoices is received from the parent company in foreign currency.

Based on the above, the applicant has raised the following three questions before the ld. AAR:

“i. Whether the services provided by the company to its parent company relating to the test benches which are in the name of MRO services, be classified under heading ‘9987 i(a): Maintenance, Repair or Overhaul services in respect of aircrafts, aircraft engines and other aircraft components or parts’?

ii. If the answer to the above is in affirmation, then whether the Place of supply is the ‘location of the recipient’ as per the Notification No. 02/2020-Integrated Tax dated 26th March, 2020, which is the location of the Parent Company (Outside India) and that can be construed as exports of services?

iii. If the answer to the first question is in negation, then we would like to know the classification of the services provided to the parent company and can it be considered as exports of services?”

The applicant contended that the above set of activities are categorised as Maintenance, Repairs and Overhaul (MRO). It was further contended that the place of supply of MRO services shall be the location of the recipient of services as per notification no. 02/2020-Integrated Tax dated 26th March, 2020.

The applicant further draws attention to the definition of ‘location of recipient’ given in section 2(14) of the IGST Act, which reads as “…where a supply is received at a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere), the location of such a fixed establishment”.

In view of the above, the applicant contended that the Parent Company is outside India, and hence, the registration is not obtained, and consequently, the place of supply shall be outside India if the services are covered under clause (b) of Section 2(14) of the IGST Act and will be Zero-rated supply as export of service.

The ld. AAR noted that the applicant is a wholly owned subsidiary of M/s Spherea Test Services, a joint stock company in France. The Parent Company sold two equipment, i.e., test benches for aeronautics cases to their customer in India, and these test benches are currently with IAF at their operational forward bases. These test benches are used to test and prove the airworthiness of the aircraft’s equipment. The test benches, on detection of any errors, are also used for the determination and correction of the errors, which will ensure the safe flight of these aircraft. The ld. AAR observed that the Parent Company has sub-contracted the services as enumerated above to the applicant.

It was further noted that the applicant has to provide the given services at the end customer’s site (IAF) and has raised an invoice to its Parent Company, and the payment against such invoices is received from the Parent Company in foreign currency.

The ld. AAR, thereafter, referred to the definition of various terms given in the agreement like: Mermoz System, Incident, Line Replaceable Unit (LRU), LRU P/N (Line Replaceable Unit Part Number), MRO’s activities, System Hardware, System Software, Test Program, etc.

The ld. AAR observed that Article 2 of the agreement deals with the scope of the agreement and Article 6 with the scope of MRO’s supply, which is explained in further exhibit, and observed that the impugned services are clearly with regard to Mermoz System, the operation of the bench and the EP (implementation and maintenance). It was also observed that the technicians of the Parent Company may participate in some tests of equipment on the bench with the customer, and the technicians will have to investigate to identify the root of the problem and initiate a Technical Fact follow-up sheet (Supply [F1]) to inform Dassault Aviation as well as the Parent Company for processing.

The ld. AAR observed that the contract is for Maintenance and Repair of the Mermoz system, which is used for testing the airworthiness of the aircraft and accordingly, impugned services are relevant to maintenance and repair services of instruments for testing airworthiness of an aircraft. The ld. AAR made reference to the Explanatory Notes to the Scheme of Classification of Services.

The relevant SAC codes are reproduced as under:

“9987:Maintenance, repair and installation (except construction) services

99871:Maintenance and repair services of fabricated metal products, machinery and equipment

998719:Maintenance and repair services of other machinery and equipment.

This service code includes maintenance and repair services of instruments and apparatus for measuring, checking, testing and navigating and other purposes such as aircraft engine instruments.”

The ld. AAR held that the impugned services are covered under maintenance and repair services of other machinery and equipment and are classifiable under SAC 998719. With respect to the applicant’s contention that their services are classifiable under 9987 as “Maintenance, repair or overhaul services in respect of aircrafts, aircraft engines and other aircraft components or parts” and hence, are taxable to GST @ 5 per cent, in terms of entry No.25 (ia) of Notification No. 11/2017-Central Tax (Rate), dated: 26th June, 2017, which is inserted vide Notification No. 02/2020-Central Tax (Rate), dated 26th March, 2020, the ld. AAR made reference to said notification and reproduced relevant part as under:

“Sl.
No.		 Chapter Section or Heading Description of Service Rate (per cent) Condition
25 Heading 9987 (i) ——- 2.5  —
(ia) Maintenance, repair or overhaul

services with respect to aircrafts,

aircraft engines and other aircraft

components or parts.”

 

The ld. AAR observed that the concessional rate of GST of 5 per cent is applicable to only Maintenance repair or overhaul services with respect to aircraft, aircraft engines and other aircraft components or parts. The ld. AAR observed that in the instant case, the applicant is providing maintenance and repair services for test bench equipment (Mermoz system) which are used for testing airworthiness of an aircraft. The said equipment does not qualify to be an aircraft or an aircraft engine, observed ld. AAR. The ld. AAR also held that it is not related to components part also since the equipment (Mermoz System) is not part of the aircraft or part of the component. It is for the repair of equipment which is used to test aircraft. To be “other aircraft components or parts”, it should form a constituent piece or ingredient that is used to build an aircraft, which is not the case here, held the ld. AAR. The test bench equipment (Mermoz system) neither forms the part of the aircraft or forms a component of the aircraft, and therefore, the said entry at Sl. No. 25 (ia) of Notification No. 11/2017-Central Tax (Rate), dated 26th June, 2017, as amended vide Notification No. 02/2020-Central Tax (Rate), dated 26th March, 2020, is not applicable to the applicant, and the ld. AAR held that the concessional rate of GST of 5 per cent is not applicable.

Regarding further questions as to whether it will be ‘export of services’, the ld. AAR made reference to the definition of said term in section 2(6) which reads as under:

“Section 2. Definitions. –
(6) ‘export of services’ means the supply of any service when,-

(i) the supplier of service is located in India;

(ii) the recipient of service is located outside India;

(iii) the place of supply of service is outside India;

(iv) the payment for such service has been received by the supplier of service in convertible foreign exchange 1 [or in Indian rupees wherever permitted by the Reserve Bank of India]; and

(v) the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8”.

The ld. AAR held that the place of supply needs to be determined to decide whether the impugned supply of services by the applicant amounts to the export of services or not. The ld. AAR further held that the determination of place of supply is beyond the jurisdiction of the authority of AAR and accordingly, rejected to decide the said question.

41 Scope of AR – High Seas Sale vis-a-vis Services

Coperion Ideal Pvt. Ltd. (App Order No. 04/AAAR dated 14th October, 2022 (UP))

The appeal in this case was against the Advance Ruling Order No. UP ADRG – 01/2022 dated 25th April, 2022, issued by the Authority for Advance Ruling Uttar Pradesh.
M/s. Coperion Ideal Pvt. Ltd. (‘Appellant’) is engaged in designing, engineering, fabrication and supply of Pneumatic Conveying System (‘PCS’) and its parts and components. PCS is a system which is used for the transportation of material through pipes from one location to another using air / gas pressure for moving the goods.

There is a requirement for imported components also.

As regards the components imported from outside India, the appellant supplies the imported components to customers in India on a High Sea sale basis under a High Sea Sale contract, which is executed while the goods are on High Seas, i.e., in transit before crossing the customs frontiers of India. The said supply is carried out by the appellant by merely transferring the title in goods to the Indian customer while the goods are on High Seas, i.e., in international waters. On arrival of goods at the customs frontiers of India, the Indian Customer, who now owns the goods as per documents of title, clears the imported goods from customs after payment of applicable import duties, which also include applicable IGST on the value of goods. Appellant raises invoice on customers towards supply of domestic components as well as for imported components sold on a High Sea Sale basis.

The appellant does not undertake any erection, commissioning, installation work of the goods supplied by it to the customers. However, customers have the option to get the supervision of the appellant for such services availed by them from third parties, which is charged separately by the appellant. As per entry 8(b) of Schedule III to the CGST Act, the High Seas Sale Supply is excluded from GST. As per said entry, “Supply of goods by the consignee to any other person, by endorsement of documents of title to the goods, after the goods have dispatched from the port of origin located outside India but before clearance for home consumption” is considered to be neither supply, supply of goods or service.

Based on the above facts, the appellant has posed the following question before the ld. AAR as under:

“Whether supply of components of the Pneumatic Conveying System by the applicant to its customers on High Sea Sales basis will be treated neither as the supply of goods nor as the supply of service by virtue of entry 8 to the Schedule III of CGST Act?”

The ld. AAR held that the above question involves deciding the ‘place of supply’, which is not within their purview and hence, declined to answer the AR.

In the appeal, the appellant tried to explain that in deciding the above question, there was no issue of deciding the ‘place of supply’, and the AR application was wrongly rejected.

The ld. AAAR made reference to section 97(2), which is reproduced in AR order as under:

“(2) The question on which the advance ruling is sought under this Act, shall be in respect of–

(a) Classification of any goods or services or both;

(b) applicability of a notification issued under the provisions of this Act;

(c) determination of time and value of supply of goods or services or both;

(d) admissibility of input tax credit of tax paid or deemed to have been paid;

(e) determination of the liability to pay tax on any goods or services or both;

(f) whether the applicant is required to be registered;

(g) whether any particular thing done by the applicant with respect to any goods or services or both amounts to or results in a supply of goods or services or both, within the meaning of that term.”
(emphasis added)”

Having the above position, the ld. AAAR observed that essentially the appellant has sought to attain clarity as to whether the transaction undertaken by him is a supply under GST or not, so that taxability of the same, if any, can be determined. Therefore, the ld. AAAR held that the question sought by the appellant before the AAR falls within the purview of Section 97(2) of the Central Goods and Service Tax Act, 2017 under clauses (e) and (g) as reproduced above. Accordingly, the ld. AAAR undertook to decide the issue.

On merits, the ld. AAAR made reference to agreement for different transactions. The ld. AAAR found that in addition to supply by High Seas, there are terms for offering optional services like installation / supervision, commissioning, etc.

In this respect, the ld. AAAR made reference to various circulars issued by the Customs as well as CBIC.

The ld. AAAR also made reference to clause 8(b) of Schedule III.

The ld. AAAR held that by the above clause, only the High Seas Supply of ‘goods’ is excluded and not post-import services. Therefore, if there are any services rendered after import, they will be taxable, observed by the ld. AAAR.

In view of the above, the ld. AAAR ruled as under:

“1. We set aside the impugned ruling UP ADRG – 01/2022 dated 25.04.2022 passed by the Authority for Advance Ruling against the Appellant as the question sought to be answered is squarely covered u/s 97(2) of the CGST ACT.

2. We hold that supply of imported goods i.e. components needed for Pneumatic Conveying System made by the appellant to its customers on High Sea Sales basis will not be treated as a supply of “goods” by virtue of entry 8(b) to the Schedule III of CGST Act, 2017 as amended, with effect from 01.02.2019. However, the supply of “services” in relation thereto, if any, will fall under the purview of “supply” as defined under Section 7 of the CGST Act.

14. The Ruling given herein above applies to the unique facts and circumstances of the appellants’ matter in appeal and is based upon the submissions and evidences made available in this regard.”

CENVAT credit

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II. Tribunal :


4. CENVAT credit :



Vodafone Essar Digilink Ltd. v. CCE., Jaipur-I, 2008 (10)
STR 139 (Tri. – Del).

  •  BSNL provided taxable
    service to the appellant and paid service tax on port and space charges. Credit
    was denied for service tax paid, alleging that BSNL was not liable to pay
    service tax in respect of port and space charges.


It was held that since the payment of service tax by BSNL was
not challenged, credit cannot be denied. Pre-deposit of duty and penalty was
waived and stay petition was allowed.

levitra

Some Recent Judgments

I. Supreme Court :


    1. Import of service : Recipient not liable prior to 1-1-2005 :

  •     Department’s appeal against the CESTAT Misc. Order No. ST/85/2008 (PB) dated 27-6-2008 in the case of Hindustan Zinc Ltd. v. Commissioner, 2008 (11) STR 338 (Tri.-LB) was dismissed with the comment ‘no merit’. In view of this, the Larger Bench’s decision that recipient of service provided from outside India or by a non-resident having no office in India is not liable to pay service tax prior to 1-1-2005. (Detailed analysis of the decision of the Larger Bench was made in September 2008 issue of BCAJ).

    2. Explanation widening tax net is not retrospective for operation :

    UOI v. Martin Lottery Agencies Ltd., 2009 (14) STR 593

  •     In the definition of business auxiliary service u/s.65(19) of the Finance Act, 1994, an explanation was inserted with effect from 16-5-2008 whereby promotion and marketing of lottery tickets was made exigible to service tax. However, the present appeal arose from a judgment and order dated 18-9-2007 (period prior to insertion of the explanation) passed by the Sikkim High Court in a writ petition filed by the respondent challenging legality wherein the High Court had not upheld the levy under the category of business auxiliary service. Service tax was sought to be recovered from the respondent agent considering the service in relation to promotion/marketing of lotteries as business auxiliary service.

    The core question that the Court had to consider was whether the explanation inserted post-decision of the Sikkim High Court was clarificatory or declaratory so as to be interpreted as having retrospective effect and retroactive operation. Referring to and relying on the decisions of several High Courts and the Supreme Court, the Court ruled that by reason of an explanation, a substantive law may be introduced. The Parliament is entitled to bring new concepts of imposition of tax and also entitled to raise legal fiction. However, when substantive law is introduced, it will have no retrospective effect. For the said purpose, an expression like ‘for the removal of doubt’ is not conclusive. The Court also stated that constitutional validity was not examined by them. However, holding that explanation was not clarificatory/declaratory, the High Court’s decision was upheld opining categorically that service tax, if any, would be payable only and with effect from May 2008, i.e. prospectively on the insertion of explanation.

II. High Court :

    3. Clearing and Forwarding Agent :

    CCE v. Kulcip Medicine Pvt. Ltd., 2009 (14) STR 608 (P & H)

    â In this case of Revenue’s appeal, the short question relates to whether or not both ‘clearing’ and ‘forwarding’ are necessary to be covered within the scope of the definition of clearing and forwarding services as the assessee was engaged in the activity of handling and distribution of products of manufacturer and thus not engaged in clearing activity i.e. he dealt with already cleared goods from the factory. The Court in this case noted and approved the decision in the case of M/s. Mahavir Generics v. CCE, Bangalore 2006 (3) STR 276 (Tri.). According to the Court, the word ‘and’ used after the word ‘clearing’ and before the word ‘forwarding’ in the definition provided in S. 65(105)(j) of the Finance Act, 1994 has to be understood in a conjunctive sense and not disjunctive. According to the Court, if the word ‘and’ was read as ‘or’, then it would amount to doing violence to the simple language used by the legislature which cannot be imputed to ignorance of English language. The Court thus expressed its inability to accept the view taken by the Larger Bench in the case of Medpro Pharma Pvt. Ltd. v. CCE, 2006 (3) STR 355 (Tri.-LB) and overruled the same. Further, stressing on the binding nature of the Board circular, the Court observed that they were meant for adoption for the purpose of bringing uniformity and on that count also, the expression ‘clearing and forwarding agent’ was interpreted in the light of the Board Circular dated 20-4-2002 issued in this regard. The Court also observed and the revenue agreed that the department had not appealed against the decision in the case of Mahavir Generics and as such it had attained finality. Thus, considering the dealer not as a clearing and forwarding agent, the revenue’s appeal was dismissed.

    4. Bottling of liquor considered manufacturing and not liable for service tax :

    SOM Distilleries Pvt. Ltd. & Ors. v. UOI & Ors., 2009 TIOL 292 HC – MP – ST – LB

  •     Question referred from Divisional Bench, whether bottling of liquor amounts to ‘manufacture’ (as defined by clause (f) of S. 2 of the Central Excise Act, 1944) of liquor or only packaging so as to attract Service Tax u/s.65(76b) of the Finance Act, 1994.

    The Court, overruling the decision of the division bench in M/s. Vindhyanchal Distilleries Pvt. Ltd. v. State of M.P. and Anr., (2007) 7 VST 197 (MP) held that packaging and bottling of liquor falls within the ambit of ‘manufacture’ and does not attract service tax u/s.65(76B) of the Finance Act, because:

  •      S. 65(76b) by referral legislation excludes from liability any process amounting to ‘manufacture’ as defined in clause (f) of S. 2 of the Central Excise Act, 1944.

  • The question as to whether exclusion clauses goods/processes would apply to non-excisable goods (as even though they fall within the definition of ‘manufacture’, alcoholic beverages are excluded from excise duty by Entry No. 92C in list 1 of Schedule VII to the Constitution of India) has now been settled by Cir. F.No. 249/1/2006-CX.4, dated 27th October 2008 to conclude that ‘manufacturing process’ is a term which must be understood distinctly and it is not necessary for every process amounting to manufacture to result in the emergence of an excisable good.

  • M/s. Vindhyanchal Distilleries (supra) was incorrectly decided in that the question of whether tax is exigible in respect of a transaction is to be determined on the terms of the contract alone, and not from the invoice issued by the person entitled to receive money under the contract. [Arun Electrics Bombay v. Commissioner of Sales Tax, (1966) 17 STC 576].

  • Further, that the process of bottling can be regarded as independent (as in M/s. Vindhyanchal Distilleries) is not correct, especially in view of the statutory requirement that liquor must be sold in sealed bottles. Therefore, packaging and bottling of liquor is a part of the manufacturing process and because it falls within the ambit of clause (f) of S. 2 of the Central Excise Act, 1944, it is excluded from service tax liability in view of the exclusionary facet of the definition contained in S. 65(76b) of the Finance Act, 1994.

III. Tribunal:
5. CENVAT Credit:

(i) Outward transportation from place of removal is input service — A Larger Bench decision:

M/s. ABB Ltd. & Others v. CCE & ST & Others, 2009 TIOL 830 CESTAT-Bang. (Tri.-LB)

The Larger Bench made a detailed analysis of the definition of ‘input service’ in terms of Rule 2(1). The definition, according to the Tribunal could be conveniently divided into the following 5 categories:

(a) Any service used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products,

(b) Any service used by the manufacturer whether directly or indirectly, in or in relation to clearance of final products from the place of removal,

(c) Services used in relation to setting up, modernisation, renovation or repairs of a factory, or an office relating to such factory,    

d) Services used in relation to advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs,

e) Services used in relation to activities relating to business and outward transportation upto the place of removal

  • The Tribunal noted that each of the limbs is an independent benefit/ concession and therefore even if an assessee satisfies one of the limbs, the credit is admissible. To illustrate this, it is stated that a service in relation to renovation or repair of factory will be allowed as credit as it is a service in relation to setting up of modernisation even if it is assumed as an activity not relating to business. Various decisions were cited and discussed in support of this contention which inter alia included Share Med.ical Care v. UOI, 2007 (2009 ELT 321 (SC), HCL Ltd. v. Collector, 2001 (130) ELT 405 (SC), Indian Petro Chemicals, 1997 (92) ELT 13 (SC).

  • The Tribunal noted that the definition of ‘input service’ includes the expression ‘activity relating to business’. The term ‘business’ is of wide import and the words ‘in relation to’ further widen the scope. The words are of comprehensiveness, which may have direct, as well as indirect significance. It is equivalent to or synonymous with ‘concerning with’ or ‘pertaining to’ which are expressions of expansion and not of contractions. Further, there is no qualification to the words’ activities relating to business’. The words ‘such as’ in the definition also are purely illustrative.

  • Transportation of goods to customer’s premises is an activity relating to business and an integral part of manufacturing business. The Tribunal further noted that if the activities like advertising and market research are eligible to credit, the service ensuring physical availability of goods i.e. transportation should also be eligible for credit.

  • The Tribunal stated that for admissibility of instant credit, there is no requirement that the cost of freight should enter the transaction value of the manufactured goods. Meaning thereby that credit cannot be automatically disallowed in cases where freight does not form part of the transaction value. Referring to the case of All India Federation of Tax Practitioners v. UOI, 2007 (7) STR 635 (SC), it stated that service tax is a value added tax in the sense that it is on commercial activities and not a charge on the business but a tax on value addition by rendition of service.

  • An additional observation that the Tribunal has made in this case is that the dispute in the case bemg that of admissibility of credit of service tax on GTA service and not one of valuation of excisable goods u/s.4 of the Central Excise Act, 1944 and therefore, the two issues viz. ‘valuation’ and ‘CENVAT Credit’ are independent and have no relevance with each other. In this frame of reference the relevant guidelines issued by OECD were discussed. Citing the decision of All India Federation of Tax Practitioners (supra), it stated that revenue’s submission that no CENVAT credit is available if the nature of service does not form part of value of goods subject to excise duty, is against the princip,l,e laid down in the said case of All India Federation of Tax Practitioners and the OECD guidelines, as service tax and excise duty are consumption taxes to be borne by the consumer. If credit is denied, Ievy T’ of service tax on transportation will become a tax on business  rather  than  on consumption.

  • Lastly, the Tribunal has further made a very important and distinct point that the interpretation of the expression ‘input service’ cannot fluctuate with the change in the definition of value in S. 4 of the Central Excise Act and cannot vary depending on whether the goods are levied to duty u/s.4A of the Excise Act or tariff value u/s.3(2) of the Excise Act. This has been done by the Tribunal while also noting the decision of Punjab & Haryana High Court in the case of Ambuja Cements Ltd. v. UOI & Others, 2009 (14) STR 3 (P&H) which provided its decision based on and approving the clarification given vide CBEC Circular No. 97/8/2009 dated 23-8-2007 as regards CENVAT credit. Thus, interpreting all the aspects of the definition of ‘input service’ in detail, it was held that GTA service of final products from the place of removal should be treated as input service.

[Note: Readers may note that the last two points make the decision distinct from the decisions provided in the case of CCE Mumbai 5 v. GTC Industries ua., 2008 (12) STR 468 (Tri.LB) and the Punjab & Haryana High Court decision in the case of Ambuja Cements Ltd. (supra). The gist of these two decisions was provided in December 2008 and May 2009 BCAJ respectively].

ii) Supplementary invoices and invoice without registration number, whether eligible for credit :

Sanghi Industries Ltd. v. CCE, Rajkot 2009 (14) STR 462 (Tri.-Ahmd.)

  • In this case CENVAT credit was denied on the ground that a supplementary invoice was issued for the amount of service tax as the original invoice omitted to mention the same. In another invoice, registration number of the service provider was not provided. It was held that Rule 9 of the CENVAT Credit Rules was not considered by the lower authorities: Substantive compliance being sufficient for granting credit, the matter was remanded to the Commissioner (Appeals) to decide afresh in the light of the aforesaid observations.

iii) Car repairs, photography, rent-a-cab, etc. used ,for business admissible as credit:

CCE, Jaipur v. J. K. Cement Works, 2009 (14) STR 538 Tri.-Del)

Revenue’s appeal against allowance of CENVAT credit in respect of rent-a-cab service, repairs of motor cars and photography services used for business purposes was dismissed on the following grounds:

(a) The revenue did not controvert use for business.

(b) Tribunal’s decisions in various cases including those in the case of Indian Rayon Industries Ltd. v. CCE, 2006 (4) STR 79, Grasim Industries v. CCE, [aipur 2008 (11) STR 168 and CCE, Nasik v. Cable Corporation of India Ltd., 2008 (12) STR 598 were considered wherein allowancy of CENVAT in relation to similar services was upheld as input services for the manufacturer based on the con-tention that ‘in relation to’ in the definition of input service has to be given wider connotation and the illustrative list of the activities is not ex-haustive as the words ‘such as’ follow the words ‘activities relating to business’. Accordingly, denial of credit was not found justified.

(iv) GTA services used for construction of plant admissible as input service:

CCE, Vadodara v. Videocon Industries Ltd., 2009 (14) (STR) 692 (Tri.-Ahmd.)

The Revenue’s appeal was rejected as service tax paid on goods transport agency service in respect of steel, cement, etc. used in civil work of new plant/factory was held as covered by the definition of input service.

Some Recent Judgments

I. Supreme Court :

    1. The date of 18-4-2006 for applicability of reverse charge achieves finality :

    UOI & Ors. v. Indian National Ship Owners, 2009 TIOL 129 SC – ST

    Special Leave Petition filed by the Government against the Mumbai High Court’s decision in the case of Indian National Ship Owners’ Association v. UOI, 2009 (18) STT 212 (Bom.) to the effect that prior to the date on which S. 66A was introduced in the Finance Act, 1994 viz. 18-4-2006, services provided outside India would not attract service tax is dismissed by the High Court. As such, the pending cases at various levels for dispute as to the applicable date for levying service tax on services provided outside India would stand settled.


II. High Court :

2. Pre-deposit of Rs.70 crores directed by Tribunal upheld :

    Microsoft Corporation (India) Pvt. Ltd. v. CST, 2009 (16) STR 545 (Del.)

(i) Background :

    The Delhi CESTAT passed a stay order in the case of Microsoft Corporation (India) Pvt. Ltd. v. CST, New Delhi, 2009 (15) STR 680 (Tri. Del.) directing pre-deposit of Rs.70 crores on the grounds that the marketing services covered under business auxiliary service which is a recipient-based service as classified under Rule 3(1)(iii) of the Export of Services Rules 2005) (the export Rules) provided by Microsoft India to its Singapore or US-based entities did not qualify as exports. The denial was on the ground that since services were provided in India and consumed by the customers of the Singapore/US entities in India, the benefits of the services were to the customers in India. The CESTAT interpreted the terms ‘delivered outside India’ and ‘used outside India’ used in the conditions in the Export Rules for treating the services as exports to mean physical performance to take place outside India. The Tribunal heavily relied on the judgment of the Supreme Court in All India Federation of Tax Practitioners & Ors. v. UOI & Ors., 2007 (7) STR 625 wherein it was held that services fall in two categories viz. property-based services and performance-based services and as per prima facie view of the Tribunal, the place of performance of a service is decisive for determining the event of taxability and incidence of tax.

    (ii) The petitioner cited before the Tribunal Circular No. 111/05/2009-ST, dated 24-2-2009 and various decisions wherein it was decided on similar facts that services were exported. This inter alia included decisions in the cases of Blue Star v. CCE, Bangalore 2008 (11) STR 23 and ABS India Ltd. v. CST, Bangalore 2009 (13) STR 65. Further, the petitioner pointed out that in cases viz. M/s. Gap International Sourcing India Pvt. Ltd. v. CST, Delhi 2009 (15) STR 270 (T) and Hitachi Home & Life Solution (I) Ltd. v. CST, Ahmedabad 2009 (16) STR 341 (Tri. Ahd.), unconditional stay was provided on similar facts considering prima facie case in favour of the appellants.

    (iii) As against the above, the Revenue’s case was that the Tribunals or Courts were not bound by the clarificatory Circulars of the Government since the Tribunal had found the Circular No. 111 (supra) to be contrary to the decision in the case of All India Federation of Tax Practitioners’ case (supra). The Revenue further contended that the Court should not be influenced by the stay orders granted by the Co-ordinate Benches of the Tribunal as the issue involved was plain import of goods, whereas the instant case was radically different as it involved peculiar term of agreement between Microsoft India with its foreign counterparts.

    (iv) The Court, although found contentions of the appellant to be convincing, concluded that only prima facie view has to be considered at the stage of stay and the Tribunal having fully considered all the relevant parameters required to be gone into including the principle that based on prima facie case interim order of protection should not be passed. Therefore, it was not province of the Court to finally pronounce on the aspects of whether or not the services were extinct in India or abroad. The Court took a view that both the sides had arguable case and the final determination was first to be done by the Tribunal. Further the order being equitable was found not fit for interference, the petition was dismissed granting 4 weeks’ time to the petitioner to make compliance with the pre-deposit.

III. Tribunal :

    3. CENVAT Credit :

(a) Repairs & maintenance service — whether an input service ?

    CCE, Vadodara v. Danke Products, 2009 (16) STR 576 (Tri. Ahd.)

    The issue involved related to whether or not service tax paid on the bill of repairing and maintenance raised on the respondent by an outsourced service provider company called DEL was a correctly availed CENVAT credit. Considering that repairs of transformer during warranty period provided by the respondent through outsourced services of DEL could be said to be an activity relating to the business, it stood concluded that the Commissioner (Appeals) had rightly treated the service as input service and held it entitled for CENVAT credit by relying on the Larger Bench’s decision in the case of ABB Ltd. v. Commissioner, 2009 (15) STR 23 (Tri.-LB) wherein it was held that the expression ‘activity relating to business’ was of large import and would take into its ambit all types of activities.

(b) Security in off-factory residential colony — Whether input service ?

    CCE, Nagpur v. UltraTech Cement Ltd., 2009 (16) STR 611 (Tri. Mum.)

The short question for consideration was whether the lower authority rightly allowed CENVAT credit of service tax paid on security service received at the off-factory residential colony of the assessee. Considering the service to be ‘input service’ for Rule 2(1) of the CENVAT Credit Rules, 2004. The respondent’s contention of allowability was based on the fact that the definition of input service included security service in its inclusive part. The Revenue, on the other hand contended relying on the decision in the case of Ponds India Ltd. v. Commissioner, 2008 (227) ELT 497 (SC) that the words ‘means and includes’ used in the definition would afford an exhaustive explanation to the meaning which must invariably be attached to the word or expression. Therefore The Tribunal accordingly observed that services mentioned in the inclusive part of the definition of input service have also to satisfy the parameters laid down in the main part of the definition as the two parts were not independent of each other and as such, the security service used for residential activity was neither a service received prior to the commencement of manufacture, but the value of which got absorbed in the value of goods, nor was it the case of a service received after the clearance of goods where the service is received up to the stage of clearance of goods. It was also not the case of a service like advertising which was not directly related to manufacture but is related to sale of manufactured goods and as such, the credit was ineligible. However, at the end of interpretation in favour of the Revenue, the assessee would not be penalised and penalties would be set aside.

c) Service tax on mobile phones and maintenance of vehicles entitled to the extent of allocated unit :

Force Motors Ltd. v. CCE, Pune-1, 2009 (16) STR 616 (Tri.-Mum)

The appellant in this case had not been able to produce evidence of use of vehicles and mobile phones for business purposes only and there was no check on use for the personal work of employees. Based on the decision in the case of Conzerve Systems (P) Ltd. 2009 (16) STR 195 (Tri.-Mum.) wherein it was held that mobile phones standing in the name of the company and used by the employees in relation to work only and incidentally used for personal work by itself was no ground for denial of credit, the Tribunal allowed the appeal by way of remand to the adjudicating authority to ascertain the quantum of taxable service beyond the allotted limit of use of mobile phones and vehicles and allowed credit availed to the extent of allotted limits and directed to follow the principle of natural justice to pass appropriate order.

d) Garden maintenance service not eligible for CENVAT credit and penalty also sustained. Outdoor catering service to factory workers considered eligible input service :
 

GKN Sinter Metals Ltd. v. CCE, Aurangabad, 2009 (16) STR 615 (Tri. Mum.)

On the issue of allowability of CENVAT credit of service tax paid to outdoor catering service used for the supply of food to factory workers, the Tribunal relying on the Larger Bench’s decision in the case of CCE, Mumbai v. GTC Industries Ltd., 2008 (12) STR (Tri.-LB) held that such credit could not be denied to a manufacturer where the cost of such supply of food was reflected on the cost of production of the final product. However, in the case of CENVAT credit of service tax taken by the assessee on garden maintenance service, relying on the decision in the case of Kirloskar Oil Engines Ltd. v. CCE, 2009 (241) ELT 474, it was held that garden maintenance service had no nexus even remotely to the manufacture or clearance of excisable goods. It further held that the matter being very clear, the assessee could not take undue benefit of pending clarificatory decisions and therefore, penalty maintained was also sustainable.

Some Recent Judgments

I    High Court:

1  CENVAT credit:

Whether outdoor catering service is ‘input service’?


CCE, Nagpur v. Ultratech Cement Ltd., 2010 TIOL 745 HC Mum.-ST

Substantive question of law raised by the Revenue was, whether CESTAT was correct in considering outdoor catering as input service when catering service does not fall under ambit of the definition of input service. Based on Larger Bench’s decision of CESTAT in the case of CCE v. GTC Industries Ltd., 2008 (12) STR 468 (Tri.-LB), wherein it was held that cost of food borne by the factory would form part of the cost of product and credit of duty paid thereon was allowable, the appeal was allowed by the Commissioner (A) and upheld by the Tribunal. According to the Revenue, decision of GTC (supra) ought not to have been applied to this case as in that case, duty was paid on assessable value whereas in the instant case, the duty on cement was payable on tonnage basis and therefore, it was distinguishable. Further, the more recent Apex Court’s decision in Maruti Suzuki Ltd. v. CCE, 2009 (240) ELT 641 (SC) squarely applied and therefore the Revenue had a case.

Detailed submissions were provided and analysis of wide scope of ‘input service’ and the expression ‘in relation to’ were made by the assessee. Meaning of the words ‘such as’ and which was followed by an illustrative list also was discussed at length citing and relying on various decisions which inter alia included, Federation of Tax Practitioners Association v. Union of India, 2007 (7) SCC 527 and Division Bench judgment in Coca Cola India P. Ltd. v. CCE, 2009 (242) ELT 268 (Bom.).

The Court observed that the Apex Court in Maruti Suzuki’s case (supra) considered the expression ‘used in relation to the manufacture of final product’ in the definition of ‘input’ and held that the ratio laid down by the Apex Court equally applied while interpreting ‘activities relating to business’ in Rule 2(1) of the CENVAT Rules. However, there lay difference as inclusive part of the definition of ‘input’ was restricted to inputs used in or in relation to ‘manufacture of final products’, whereas inclusive part of the definition of ‘input service’ extended to services used prior, during the course of and after the manufacture of final products and that the definition of ‘input service’ was wider than that of ‘input’. However, there was no difficulty found in applying the ratio laid in the said case of Maruti Suzuki (supra) and held that services having integral connection with manufacture as well as business of manufacture of final product would qualify to be ‘input service’.

The Revenue’s contention that not only the ratio but the decision in the case of Maruti Suzuki (supra) must be applied ipso facto to the instant case was not accepted. It was further observed by the Court that the definition of ‘input service’ read as a whole made it clear that it not only covered services used directly/indirectly in relation to manufacture, but also other services integrally connected with the business of manufacturing final product and as such, credit of service tax paid as outdoor catering service would be allowable and the question of law raised was answered in affirmative in favour of the assessee.

2    Mandap keeper’s service:

(i)    Can letting out lawn by a members’ club to its member be taxable under ‘Mandap Keeper Services’?
(ii)    Is ‘member’ a ‘client’ of the club?


Karnavati Club Ltd. v. Union of India, 2010 (20) STR 169 (Guj.)

The appellant is a members’ club registered under the provisions of the Companies Act, 1956. It does not have any shareholders. It makes available facilities to its members and their guests and recovers the expenses. Persons are made members against payment of subscription.

The Court observed the following:

To make the activity of the above club taxable under ‘Mandap Keeper Services’, the members of the club should fall within the definition of ‘client’.

After referring to various definitions of ‘client’, the Court inferred that a client is a one who applies for service or advice or who retains a solicitor in the management of his suit. Since the principle of mutuality is squarely applicable in the current case, a member cannot be said to be a ‘client’ of the club.

Held that the activity of the club cannot be taxable under ‘Mandap Keeper Services’.

(P.S.?: The above case pertains to the period prior to 16-5-2008. With effect from 16-5-2008, the word ‘client’ has been replaced with ‘any person’ vide Circular 334/1/2008)

3    Rebate:

Whether a procedural lapse could result denial of rebate claim?


Commissioner of Service Tax v. Convergys India Pvt. Ltd., 2010 (20) STR 166 (P & H)

The question before the Tribunal was that whether the Department was justified in rejecting the rebate claim for want of declaration prior to making exports as provided in Notification No. 12/2005 ST, dated 19th April 2005. The High Court noticed that delay in filing of declaration, in the present case, was due to the respondents considering many options after introduction of such Notification and also delay in obtaining management’s approval for the same. The Supreme Court in the case of Mangalore Chemicals & Fertilisers v. Deputy Commissioner, [1991 (55) ELT 437] has held that the procedural requirement can be condoned for valid reasons and as such dismissed the appeal of the Revenue.

4    Registration:

  •    Whether centralised registration is deemed to be granted within seven days?
  •     Can the Department grant registration under the category other than what the assessee applied for?
  •     Whether Circulars, which are challenged but the outcome is pending, are binding on the Department?

Karamchand Thapar & Bros. v. Union of India, 2010 (20) STR 3 (Cal.)

The petitioner applied for registration under ‘business auxiliary services’ under which he was covered with effect from 16th June 2005. Further, it also applied for a centralised registration to the Commissioner in November 2005. However, the Department granted centralised registration under the category of ‘clearing and forwarding agent’ on 11th September 2007.

The issues before the High Court were whether registration certificate is deemed to be granted within seven days, whether the Circulars, which were challenged by the Department, were binding on the Department. The High Court observed as follows:

  •     Rule 4(5) of the Service Tax Rules, 1994 which portrays such deeming fiction is applicable only to the Superintendent and the same was not applicable to the Commissioners in case of centralised registration under Rule 4(2). Therefore, the centralised registration could not be deemed to be granted within seven days.

  •    Further, there was no such time limit prescribed for the Commissioners to issue centralised registration certificate. However, the registration should be granted within a reasonable time. In the present case, in view of Circulars, seven days was a reasonable time.

  •     The High Court also made a note that although S. 69 requires all registration applications to be submitted to the Superintendent, it does not dilute the authority of the Commissioner to grant such registration under Rule 4.

  •     There are no provisions under the Service Tax Rules to refuse application for registration. Circular No. 72/2/2004 ST, dated 2nd January 2004 provides that the jurisdictional officer cannot question the correctness of declaration made by the applicant.

  •    As held in various judgments, the Circulars are binding on the Department. Though the Supreme Court in the case of CCE, Bolpur v. Ratan Melting and Wire Industries [2008 (12) STR 416] has held that the Circulars can be challenged by the Department, the said judgment did not apply to facts of the case since neither there were contrary decisions nor was the Circular contrary to the statute.

  •     Even when the Circular is challenged, the binding effect continues until the challenge succeeded.

  •     Therefore, the registration should be granted under the category of ‘Business Auxiliary Services’ and the Commissioner did not have power to grant registration on his own without receiving any application for registration under that specific category.

  •     There are no provisions in the service tax laws which lay down the consequences of delay in application for registration. Therefore, though there was a delay in application for registration by the petitioner, the Department could not reject the application, nor could he grant registration under a different category. However, recovery and/or penal proceedings might be initiated for non-payment of service tax.

II.    TRIBUNAL:

5 Applicability of Service Tax:

Whether executory work like false ceiling, partitions, flooring, etc. undertaken without any advice, consultancy or technical assistance be covered as interior decorator services?

Spandrel v. Commissioner of C. Ex., Hyderabad/Kochi, 2010 (20) STR 129 (Tri.-Bang.)

The appellants were engaged in executing interior works such as pest control, demolition and dismantling, masonry work, wall preparation, partition of banks, firms, etc. The said work was intended to be taxed as ‘Interior Decorator Services’ by the Department.

The appellants put forth the claim that interior decorator means any person engaged in the business of providing by way of advice, consultancy and technical assistance. Further, the appellants referred to Circular No. B1/6/2005 TRU, dated 27th July 2005 and contended that execution of the above work falls under the category of ‘Commercial or Industrial Construction Services’ introduced from 16th June 2005. The appellants relying on various judgments claimed that these services were notified from 16th June 2005 and therefore, were not taxable earlier.

The Department argued that the scope of interior decorator was not only restricted to advice, consultancy or technical assistance, but also extends to beautification of spaces.

The Tribunal held as follows:

The Department did not have findings that the appellants were engaged in advice, consultancy and technical assistance or planning work and designing. The executory work of the appellants was specifically covered by commercial or industrial construction services and therefore, the same could be held to be covered under any other category prior to introduction of commercial or industrial construction services and allowed the appeal.

6 Appeal:

Whether legal representative can file the appeal on behalf of deceased assessee?

Abhay Intelligence & Security Service v. Commissioner of C. Ex., Vadodara, 2010 (20) STR 204 (Tri.-Ahmd.)

The appellants challenged the levy of penalty on dissolved proprietorship firm after death of the proprietor and relied on various decisions. The Tribunal observed that the ratio laid down in those decisions is that the appeal filed by a legal representative against penalty on deceased is not maintainable. However, the penalty being personal in nature can be recovered only from the person on whom it was imposed and as such it could not be recovered from a legal representative.

7 CENVAT Credit:

7.1 Whether CENVAT credit be allowed on Garden Maintenance Services?

ISMT Ltd. v. Commissioner of C. Ex. & Cus., Aurangabad, 2010 (20) STR 68 (Tri.-Mumbai)

The limited issue before the Tribunal was whether CENVAT credit was allowed on garden maintenance services. The appellants relied on Millipore India Ltd. v. CCE, Bangalore II [2009 (13) STR 616 (Tribunal); 2009 (236) ELT 145 (Tri-Bang.)], which held that modernisation, renovation and repairs, etc. of office premises and landscaping, the surroundings of factory can be considered as input services.

The Department relied on Kirloskar Oil Engines Ltd., [2009 (241) ELT 474 (Tribunal)] which held that ‘garden maintenance services’ do not have any nexus with the manufacture or clearance of final product. They also relied on the decision given in Maruti Suzuki Ltd. v. CCE, Delhi III [2009 (240) ELT 641] (SC) and stated that ‘input’ and ‘input services’ were identical and therefore, CENVAT credit was not admissible.

The Tribunal observed as follows:

  •     Mumbai High Court in case of Coca Cola [2009 (15) STR 657] has held that input services include services used in relation to business. The Tribunal would look whether garden maintenance was related to business activities. It was also observed in the said case that the term ‘activities relating to business’ used in ‘input services’ widens the scope of such definition and conceptually any input service which forms part of the assessable value of final product should be eligible for CENVAT credit.

  •     Maruti Suzuki case cited by the Department relates to definition of ‘input’. The definitions of ‘input’ and ‘input service’ are not comparable at all. Therefore, ratio of such judgment cannot be considered for the present case. The intention of the Legislature is very clear to have different definitions of ‘input’ and ‘input service’. The words ‘used in or in relation to manufacture of final product’ deployed in ‘input’ are not used in the definition of ‘input service’. Further, the Revenue has relied on the judgment of this Tribunal in the case of Kirloskar Oil Engines (supra) and Vikram Ispat (2009 (16) STR 195), but both these cases did not take a note of Coca Cola case (supra) delivered by the Mumbai High Court.

  •     In Force Motors Ltd. v. CCE, Pune [2010 (18) STR 150], the Tribunal had observed that the definition of ‘input service’ should be considered in two parts, one inclusive and another exclusive part. Further, the activities specified after the phrase ‘such as’ are only illustrations and there fore the activities other than those illustrated may get covered.

  •     A good garden increases the working efficiency and consumer also feels good and therefore, garden maintenance services are in relation to business activity. CENVAT credit was, therefore, allowed.

Kirloskar Oil Engines Ltd. v. Commissioner of C. Ex., Aurangabad, 2010 (20) STR 30 (Tri.-Mumbai)

The issue before the Tribunal again related to CENVAT credit on garden maintenance services. The Department put forth that there were contrary judgments on the disputed issue and therefore, the same should be referred to the Larger Bench. The Tribunal observed that the contrary judgment was given in case of the appellants itself and such matter was remanded back for fresh adjudication but the law was already settled in Coca Cola India Pvt. Ltd. v. CCE, [2009 (151) STR 657, 2009 (242) ELT 168]. The Tribunal allowed the CENVAT credit on garden maintenance following the decision given in ISMT Ltd. case discussed above.

7.2 Whether interest is leviable for wrong avail-ment of CENVAT credit?


Commissioner of C. Ex., Pondicherry v. Superfil Products, 2010 (20) STR 279 (Tri.-Chennai)

The manufacturer availed but not utilised CENVAT credit of inputs and capital goods and also availed benefit of exemption Notification No. 30/2004, dated 9th July 2004. However, the CENVAT credit on inputs lying in the factory and inputs in process etc. was not reversed.

The Department claimed that interest was payable even on wrong availment of CENVAT credit in view of Rule 14 of the CENVAT Credit Rules, 2004. However, the respondents alleged that there was sufficient balance in the CENVAT credit account and therefore, it has not got any pecuniary benefit. The respondents also relied on the judgment delivered by P & H High Court in the case of CCE, Delhi-III v. Maruti Udyog Ltd., (2007 (214) ELT 173) which was affirmed by the Apex Court in (2007 (214)    ELT A50) wherein it has been held that in the absence of utilisation of CENVAT credit, interest shall not be leviable.

The Tribunal observed that for interpreting Rule 14 of the CENVAT Credit Rules, 2004, the words ‘taken or utilised’ should be construed as ‘taken and utilised’. It was held that in the present case, interest is not justifiable. However, in case when the CENVAT credit balance is less than the credit to be reversed, then the balance should be paid in cash with interest.

7.3 Whether CENVAT Credit is allowed on capital goods received in the factory before the assessee becoming liable to service tax?

ABC Engineering Works v. Commissioner of C. Ex., Guntur, 2010 (20) STR 145 (Tri.-Bang.)

The appellants were engaged in providing site formation and clearance, excavation and earth-moving and demolition services. The appellants took CENVAT credit on excavators during 30th September 2005 and 31st March 2006. However, such excavators were purchased prior to 16th June 2005 i.e., prior to the introduction of the above service in the service tax net.

The appellants submitted that the excavators were purchased after introduction of the CENVAT Credit Rules, 2004 and put to use after introduction of service. Such capital goods were not used in providing exempted services and therefore, CENVAT should be allowed. The appellants relied on the Tribunal’s judgment in the case of ACE Timez v. CCE, Bangalore, [2004 (170) ELT 371]. The Tribunal observed and held that in case of Spenta Interna-tional Ltd., [2007 (216) ELT 133], the Larger Bench of Tribunal held that eligibility of CENVAT credit has to be determined based on dutiability of final product on date of receipt of capital goods in the factory, instead of date of utilisation of CENVAT credit. Further ACE Timez case (supra) is based on different facts and ratio thereof cannot be applied to the present case. The assessee therein was availing exemption and therefore, provisions of Rule 6(4) of the CENVAT Credit Rules, 2004 did not apply to the assessee. The ratio laid down by the Board’s Circular No. 137/120/2008-CX-4, dated 24th June, 2008 relied on by the Commissioner provides that the CENVAT credit of CVD paid on the aircrafts before introduction of such services cannot be available to assessee even when the same is included in the definition of capital goods in view of Rule 6(4). Eventually, the Tribunal denied the CENVAT credit on excavators. However, since the question related to interpretation of law, the penalty was waived.

7.4 Whether CENVAT credit is available for input services utilised outside the factory premises?


Atul Auto Ltd. v. Commissioner of C. Ex., Rajkot, 2010 (20) STR 275 (Tri.-Ahmd.)

The appellants were denied CENVAT credit on erection, installation and commissioning services of wind mills for generation of electricity outside the factory premises.

The?Tribunal?observed?that?the power generated at the wind mills was not directly used by the appellants. It also relied on the decision given in Rajhans Metals (P) Ltd., [2007 (8) STR 498] and held that wind mill firm unit being not a part of the appellant’s factory premises, CENVAT credit cannot be allowed.

7.5 Whether CENVAT credit is allowed on agricultural work, on levelling of children park and tree plantation and construction of toilet in village?


Commissioner of C. Ex., Salem v. ITC Ltd., 2010 (20) STR 141 (Tri.-Mumbai)

The Tribunal held that service tax paid on agricul-tural work is allowed relying on the decision given in the case of Millipore India Ltd. v. CCE, [2009

(13)    STR 616, 2009 (236) ELT 145). However, since levelling of children park and tree plantation and construction of toilet in village are not relating to business of the respondent, CENVAT credit was held to be disallowed.

8  Export of services:

Whether procuring orders for parent company abroad be considered as export of services?

Lenovo (India) Pvt. Ltd. v. Commissioner of C. Ex., Bangalore, 2010 (20) STR 66 (Tri.-Bang)

The appellants were procuring orders for their foreign parent company classifiable under ‘Business Auxiliary Services’ and were receiving commission for such services. Rebate was claimed under Rule 5 of the CENVAT Credit Rules, 2004 for service tax paid on such commission. The Department rejected the rebate claim on the ground that the appellants promote the product of Singapore-based parent company in India, therefore the said services are rendered in India and they do not qualify to be considered exports. Further, it also claimed that services are rendered to its own concern and the appellant’s office can be considered as office of foreign parent company. Therefore, the recipient of service is not located outside India.

The appellants claimed that they and the parent company were separate entities. Moreover, the recipient was located outside India and parent company does not have an office in India. Therefore, they argued that the services were utilised abroad. The appellants also took support of Blue Star v. CCE, Bangalore, [2008 (11) STR 23] and ABS Ltd. v. CCE, Bangalore, [2009 (13) STR 65] delivered by the Bangalore Tribunal. Since the issue was squarely covered by the said judgments, the ap-peal was allowed.

9 Refund of CENVAT:

9.1 Can Refund of CENVAT credit be denied if it is not filed in the same month?

Can it be disallowed as the invoices were raised on a person acting as Pure Agent and paid by such Agent?

Can credit on input services received for consultancy on acquisition of a business be disallowed because that business is not yet acquired? Whether credit can be disallowed in the absence of specified evidence as to why the credit was not admitted?

Commissioner of Central Excise, Mysore v. Chamundi Textiles (Silk Mills) Ltd., 2010 (20) STR 219 (Tri.-Bang.)

The respondent is a 100% EOU engaged in the business of manufacturing and exporting silk and allied fabrics. They had availed CENVAT credit of service tax paid on services received by them. But the Revenue rejected the claim of refund of the above CENVAT credit on the following grounds:

  •     CENVAT credit was taken on the goods which were not manufactured in the month in which the claim was made.
  •    The invoices were raised on a person acting as a Pure Agent, credit could not be allowed.
  •    The commission received for acquisition of business outside India would not qualify as input service as the business was not acquired till that date.
  •     The assessee failed to prove the nexus of invoices that were addressed to the Head Office but actually related to the Mysore Unit.

The Tribunal’s observations were as follows:

  •     If some credit is admissible in a particular month, it shall be admissible in the succeeding month too. It is natural that there will be a time lag between availment of credit on the goods manufactured and the export of those goods. CBEC has prescribed a time limit of one year for filing the refund claim and the refund should be filed on a quarterly basis. Hence, it is natural that if an exporter is claiming refund after 9 months, it would not be relating to the goods of that month.

Thus, the claim of refund cannot be denied on this ground.

  •     The invoice had been raised on a person acting as Pure Agent on account of the appellant. The Pure Agent had discharged liabilities which would otherwise have been discharged by the appellant.

Thus, the credit cannot be denied on this ground also.

  •     In regard to the Consultancy Service (Commission) received for acquisition of business outside India, it was observed that the company was yet to be acquired and pending such acquisition, it could not be concluded if the consultancy received has been used in the business activity. Hence, CENVAT credit on the said service was not admissible.

  •     The Tribunal also perused the invoices that were raised on the Head Office. It was found that they related to the activities of Mysore Unit. The respondent also submitted that no explanation was given by the Revenue regard-ing the inadmissibility of credit relating to such invoices. The Court thus dismissed the appeal of the Revenue on the grounds that there was no special evidence as to why the credit could not be allowed.

9.2 Whether airfreight services received by appellants till goods are loaded onto aircraft are eligible for CENVAT credit? Whether Department is justified in denying refund in months of no export?

Fine Care Biosystems v. Commissioner of C. Ex., Ahmedabad, 2010 (20) STR 193 (Tri.-Ahmd.)

The Department rejected the refund claim for the months where no export took place. Further, it also rejected the refund claim for the CHA and airfreight services.

The Tribunal made the observations that in Delhi Tribunal’s decision in case of Philco Exports v. CCE, New Delhi [2009 (234) ELT 568] it was held that the time lag between the date of receipt of inputs, the date on which they are used and the date of export are not relevant. The issue to be looked into is whether the input services were used in relation to manufacture of export goods. Accordingly, there is no restriction on availment of CENVAT credit for exporters and only when adjustment is not permissible, Rule 5 allows for refund of CENVAT credit. Therefore, for the months where no export sales were made, CENVAT credit cannot be denied. Further, in case of export sales made on FOB or CIF basis, the place of removal has to be the port of export. Therefore, the Com-missioner rightly allowed CENVAT credit on CHA services. Taking the same analogy, CENVAT credit on airfreight services till load port is allowable.

9.3 Whether Department justified in denying claim of refund on the basis of declaration in ARE-1 that the CENVAT credit was not availed by the assessee?

Fine Care Biosystems v. Commissioner of C. Ex., Ahmedabad, 2010 (20) STR 241 (Tri.-Ahmd.)

The Department denied refund claim to the ap-pellants, a 100% EOU, on the basis that the appellants had declared in ARE -1 that it has not availed CENVAT credit and such declaration should be treated as final. The Tribunal held that Rule 5 of the CENVAT Credit Rules, 2004 requires that goods should have been exported, the CENVAT credit taken should be eligible CENVAT credit and credit could not have been utilised for payment of duty of finished goods by way of adjustment. Further, there is no requirement under Rule 5 for giving any declaration in ARE-1. The declaration requirements are made to facilitate exporters to have their legitimate export benefit entitlement without delay and the same should not be used to deny the legitimate entitlement.

10 Remand:

Whether Commissioner (Appeals) has power to remand back the service tax cases? Commissioner of Service Tax, Delhi v. World Vision, 2010 (20) STR 49 (Tri.-Delhi)

The Tribunal held that the Commissioner (Appeals) can remand the matter u/s.85(4) and the provisions of S. 35, S. 35A and S. 35B of the Central Excise Act were not made applicable to service tax vide S. 83 of the Finance Act, 1994. It also concluded that S. 85(5) related to procedural aspects only and it cannot be interpreted to restrict the powers of the Commissioner (Appeals).

11 Unjust enrichment:

Whether booking of space or time in media are ‘Advertising Agency services’?? Whether unjust enrichment is applicable in case when Department does not have clear finding?

C.S.T., Ahmedabad v. Poornima Advertising & Pro-motion Pvt. Ltd., 2010 (20) STR 107 (Tri.-Ahmd.)

The assessee claimed refund of excess service tax paid without considering discount. The Commissioner (Appeals) held that though the assessee is eligible for refund on merits, refund cannot be allowed in the present case applying doctrine of unjust enrichment. The Tribunal held that refund is eligible on merits on the grounds that:

  •    The Department contended that the scope of ‘Advertising Agency Services’ covers services in connection with advertisement including services connected with display or exhibition of advertisement and the services. However, Master Circular was against such interpretation. Therefore, merely canvassing advertisement for public on commission basis is classifiable under ‘Business Auxiliary Services’ and not under ‘Advertising Agency Services’. In respect of unjust enrichment, the Tribunal observed that the issue of credit note was sufficient to prove repayment of excess service tax and further that the Department did not have clear finding that such amount was not refunded. Thus, the appeal was allowed.

Some Recent Judgments

I. High Court :

    1. Binding nature of law laid down by High Court’s order :

    A.C. Nielsen ORG – MARG Pvt. Ltd. v. UOI 2009 (16) STR 259 (Bom.)

    Order dated : 22-7-2009

    The petitioner in this case was denied waiver of pre-deposit by the Tribunal in the issue of service tax demand as recipient of service for the period prior to 18-4-2006, in spite of relying on the High Court decision in the case of Indian National Shipowners Association v. UOI, 2009 (13) STR 235 (Bom). The High Court ruled that once this Court lays down the law that the recipient of the service was not liable for paying service tax, that law was binding on all Tribunals and authorities functioning within the jurisdiction of this Court and accordingly, directed to proceed with the appeal without any pre-deposit.

2. When appeal relates to rate of duty, Supreme Court is the authority u/s.35L :

    CST v. Delhi Gymkhana Club Ltd., 249 (16) STR 129 (Del.)

    In the instant case, the Tribunal had dismissed the appeal made by the Revenue against the order of the Commissioner (Appeals) who, relying on the judgments of the Calcutta High Court in the cases of Saturday Club Ltd. v. A.C. Service Tax, 2006 (3) STR 305 (Cal.) and Dalhousie Institute v. AC Service Tax, 2006 (3) STR 311 (Cal.), had held that the service provided by a club to its members did not attract service tax as principle of mutuality prevailed in such cases. The Revenue, challenging the order of the Tribunal filed appeal in the Delhi High Court u/s.35 of the Central Excise Act read with S. 83 of the Finance Act, 1994. In terms of the provisions of S. 35G read with S. 35L of the Central Excise Act against certain orders of the Tribunals, appeal is to be made to the High Court, whereas in respect of certain other orders passed by the Tribunal, a direct appeal to the Supreme Court has to be made. The High Court in this case, accepting the respondent’s contention, held that the appeal would not be maintainable as the question decided by the Tribunal relates to the rate of duty and when the issue relates to the rate of duty or tax or value of goods or assessment, relying on the decision in the case of Navin Chemical Mfg. & Trading Co. Ltd. v. Collector, 1993 (68) ELT 3 (SC), the remedy for the appellant to file appeal u/s.35L was to be to the Supreme Court and therefore, the appeal was held not maintainable on this ground.

II. Tribunal :

3. CENVAT credit :

    CCE & CUS Guntur v. CCL Products (India) Ltd., 2009 (16) STR 305 (Tri.-Bang.)

    Final Order 216-220/2009 & Stay Orders 303-305/2009, all dated 20-3-2009

    The issue involved related to denial of credit availed on service tax paid on insurance premium, repair of vehicles, AMC charges on telecom & courier charges not considering the said services as input services. Considering inclusive part of the definition of ‘input service’ as exhaustive and having a bearing on the main part of the definition and further considering expressions ‘in or in relation to’ expansive, the Commissioner (Appeals) held the services used by the manufacturer as in relation to the manufacture and clearance of final products. Relying on the Larger Bench’s decision in the case of Commissioner v. GTC Industries Ltd., 2008 (12) STR 468 (Tri.-LB) and which was followed in 2009 (13) STR 616 (Tri.), the Tribunal rejected the Revenue’s contention that courier services were akin to outward transportation of final goods and therefore they could not be treated as ‘input service’ under Rule 2(1) of the CENVAT Credit Rules as per decision in the case of Universal Cables Ltd. v. CCE, 2007 (7) STR 310 (Tri. Del.) and thus maintained the order of lower authority relying on the decision in the case of GTC Industries (supra).

    Wrong classification by service provider cannot make credit ineligible :

    CCE, Chennai v. Carborandum Universal Ltd., 2009 (16) STR 181 (Tri.-Chennai)

    Input credit was considered ineligible on the ground that the service involved was classifiable under manpower recruitment and supply agency, and not business auxiliary service, although the same was claimed on valid documents on which service tax was paid by the respondent. The period in which credit was taken was prior to 16-6-2005, during which time the service of manpower supply was not taxable. Holding that service tax was paid by the provider of service under the business auxiliary service and it was so assessed, credit taken based on valid documents could not be questioned on the basis that the assessment of the service by the department at the end of service provider was incorrect, the appeal of the Revenue was dismissed.

    Rebate under Notification No. 12/2005-ST : Liberal view of procedural lapse for exports :

    CST Delhi v. Convergys India P. Ltd., 2009 (16) STR 198 (Tri.-Del)

The respondent provides customer care services on behalf of foreign clients through telephone, email and web-based interaction. These services being in the nature of exports, claim of rebate was lodged under Notification 12/2005-ST. They used several input services like advertising, courier, leased circuit, rent-a-cab services, security agencies, management consultancy services, air travel agencies, online information services, etc. and inter alia also used management consultancy services from outside India. Rebate claim was rejected on the grounds that declaration being a mandatory requirement was filed late and some of the services were not used for providing output services but used for maintaining capital assets/ goods, etc. and therefore could not be considered input services. Provisions of Notification 12/2005-ST were discussed at length. Late filing of declaration was considered procedural lapse, where by substantive benefit was considered not deniable. Further, rebate was considered admissible also considering that the definition of input service was inclusive and that when cost of the goods and services becomes part of cost of output services, such goods or services in common parlance are inputs and input services in relation to final products are output services. Accordingly, services used in connection with procurement of other input services are also to be treated as input services. Similarly, services used in day-to-day activity like maintenance services, etc. are input services. The eligible criteria under the CENVAT Credit Rules get satisfied if services in part or full are used for taxable services and therefore, the rebate would be admissible. The Tribunal further observed that in respect of exports, a liberal view requires to be taken.

4. Longer period of limitation:

Whether sustainable when disclosure provided in ST-3 Returns:

CCE Kanpur v. Taj Tours & Travels, 2009 (16) STR 273 (Tri.-Del.)

The respondent, a tour operator, provided services of monumental tours, local transportation, rail/ air ticket booking, etc. on behalf of principal agents. The turnover representing purchase of tickets and principal’s services was deducted from the value of taxable services, and accordingly remark was made in the ST-3Returns. Suppression was alleged by the Revenue. Since disclosure was made in the ST-3 Returns, charge of misstatement or suppression was held incorrect and the Commissioner (Appeals)’s ruling based on judgments in the cases of Anand Nishikawa Co. v. CCE, 1995 (75) ELT 721 (SC), etc. that mere failure to give some information did not amount to willful mis-declaration and that there must be a positive act from assessee to final willful suppression was upheld.

When Department has knowledge, whether invokable?

Mahaveer Generics v. CCE, Bangalore 2009 (16) STR 289 (Tri.-Chennai)

Stay Order dated 2-4-2009.

The appellant, a consignment agent of CIPLA, made a stay plea for non-applicability of longer period of limitation as the activity of the firm was known to the Department, as service tax demanded from the firm as clearing and forwarding agency was set aside by the Tribunal rejecting interpretation of the Revenue. Prima facie considering the appellant not guilty of suppression of facts with intent to evade-payment of duty so as to attract longer period of limitation, pre-deposit of service tax and penalty was totally stayed.

When invoked consequent upon audit:

Aditya College of Competitive Exams v. CCE, 2009 (16) STR 154 (Tri.-Bang.)

Appellant is a commercial training and coaching centre. It had collected certain amount towards service to be provided prior to the date on which levy was introduced viz. 1-7-2003. An amendment in S. 67 was made effective 13-5-2005 to levy service tax on advances received for the services to be provided. However, since this amendment was made later i.e., from 13-5-2005, it could not have retrospective effect according to the appellant. Further, the demand was made by the Assistant Commissioner based on audit objection. Relying on the decision in the case of Vikram Ispat v. CCE, Raigad 2007 (8) STR 554 (Tri.-Mum), the demand was held as barred by limitation and therefore penalty, etc. could not be upheld.

5. Penalty:

Deccan Mechanical & Chemical Industry Pvt. Ltd. v. CCE, Pune 2009 (16) STR 263 (Tri.-Mum.)

Order dated 24-3-2009

The appellant paid service tax with interest before issuance of show-cause notice and pleaded for waiver of penalty levied u/ s.76. The Revenue insisted on pre-deposit on the strength of judgment of the Supreme Court in the case of Union of India v. Dharmendra Textile Processor, 2008 (231) ELT 3 (sq. The Tribunal on weighing arguments by both the sides held that prima facie S. 76 was not comparable with penalty imposable u/s.ll AC of the Central Excise Act which provided for penalty on defaults arising on account of fraud, suppression or contravention of law with an intent to evade payment of duty and therefore held that on the strength of such case law, prima facie waiver of pre-deposit could not be resisted upon.

6. Rectification  of mistake  (ROM) :

Ridhi Sidhi Transport v. CCE, 2009 (16) STR 271 (Tri.-Bang.)

Order 25/ /2009, dated 5-5-2009.

In this case, the Tribunal in its order made a mention about contention of the appellant with regard to non-applicability of extended period of limitation. However, no finding on the issue was provided and therefore, ROM application was filed. Despite the Revenue’s view that ROM would mean review by the Tribunal itself, it was held that recalling was necessary in the interest of principles of natural justice and matter was decided to be reheard.

8. Valuation: Whether collection for ‘mess charge’ includible ?

Aditya College of Competitive  Exams v. CCE, 2009 (16) STR 154 (Tri.-Bang.)

In this case, the Revenue demanded service tax by including mess charge collected by the college in the value of taxable service. It was held categorically that there should be nexus between the amount collected and services rendered. Mess charges were collected for availing facility of the mess. It cannot be brought under the category of receipt for commercial training and coaching service and subject it to service tax. There is no provision for inclusion of any amount whatsoever collected by the appellant. Demand was held as unsustainable.

Part B — Some recent landmark judgments

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New Page 1

I. High Court :

1. Whether order liable to be set aside when issued after
a period of more than four months after hearing ?

Shivsagar Veg. Restaurant v. Asstt. Commr. Of Income-tax,
Mumbai, 2009 (13) STR 11 (Bom.)

The appellant was aggrieved by the order of ITAT as the order
was passed after 4 months of hearing, dismissing the appeal without recording
reasons, propositions of the law urged and case laws relied upon by them.

It was contended that Appellate authority could not just stay
away from its duty of assigning reasons as to why it agreed with the reasons and
findings of the lower authority by just stating that findings of CIT(A) are
just, fair and in accordance with the law and inter alia decisions in the
cases of Jawahar Lal Singh v. Naresh Singh, (1987) 2 SCC 222 and State
of West Bengal v. Atul Krishna Shaw, AIR 1990 SC 2205 were relied upon.
Various judgments had been considered for prejudice caused to the litigant as
regards delayed delivery and even pronouncement. Relying inter alia on
the case of Anil Rai v. State of Bihar, 2002 (3) BCR (SC) 360, the Court
directed the president of the Appellate Tribunal to issue guidelines to all the
Benches of Tribunal to decide matters heard within three months from the date of
closing of judgment. The Appellate Tribunal directed to rehear the said appeal
and give fresh order with sound reasons.

II. Tribunal :

2.
Coaching services provided online
whether classifiable as online information and data based services ?

Burden of
proof on the Department.

Dewsoft Overseas Pvt. Ltd. V. CST, New Delhi 2008 (12)
STR 730 (Tri.-Del.)

(i) The issue in the case related to whether providing online
computer training is classifiable as online information and data-based access
and retrieval service. As the essential character of the service provided
involved computer education through the medium of Internet, the service was not
restricted to merely providing online access to data or information and
therefore was classifiable as commercial training and coaching service. However,
Notification No. 9/03-ST, dated 20-6-2003 exempted computer training institutes,
the appellant’s activity was held as exempt.

(ii) The appellant provided the said services of computer
training through various franchisees. During the period under dispute, four
conditions were required to be fulfilled cumulatively in order to hold the
arrangement as ‘franchise’. The Tribunal held that the burden of proving that
all the conditions were fulfilled lay on the Revenue. Since the Revenue failed
to do so, the Tribunal held that no service tax was payable as the arrangement
could not be considered as ‘franchise’.

3. CENVAT Credit — whether credit for service tax paid on
cell phones, landline and courier services while providing output services of
maintenance and repairs allowable ?

No penalty where dispute relating to interpretation of
statute.

Wiptech Peripherals Pvt. Ltd. V. CCE, Rajkot 2008 (12)
STR 716 (Tri.-Ahmd.)

The Tribunal held that the issue relating to service tax on
cell phones or landlines was no more res integra and stood settled by
various Tribunal decisions. However, since the appellant was unable to establish
that cell phones in the names of individuals were exclusively used in relation
to output services, the matter was remanded to the original authority for
verifying the said facts.

The Tribunal held that no penalty can be levied when the
dispute relates to interpretation of the provisions of law, while setting aside
the penalty.

4. Institutes registered with UGC, whether considered commercial coaching
centre :

ICFAI v. CC & CE, Hyderabad-II, (2008) 17 STT 501
(Bang.-CESTAT)

The appellant, a non-profit society registered under the
State Societies Registration Act imparts education and awards degrees/diplomas
recognised by the law. Service tax was demanded under ‘Commercial Training &
Coaching Service’. The Commissioner held that absence of profit motive was an
immaterial factor and rejected the contention of the appellant. The appellant
contended that the Institutes were societies for educational purposes and their
surplus was pooled back for attainment of their objectives. ICFAI, Dehradun and
ICFAI, Tripura were recognised as universities under the affiliated universities
of Universities Grants Commission and the institutions were exempted from
payment of Income-tax u/s.12A or u/s.10(23C)(vi) of the Act. Circular No.
59/8/2003-ST, dated 20-6-2003 clarified that institutes or establishments which
issued certificate, diploma or degree recognised by law and provided training
for competitive examinations were outside the scope of service tax. The
difference between ‘education’ and ‘coaching or training’ was emphasised and
reliance was placed on Bihar Institute of Mining and Mine Surveying v. CIT,
(1994) 208 ITR 608 (Pat.) for the same. Further, replacement of the word
‘commercial concern’ with ‘any person’ w.e.f. 1-5-2006 had not been effected in
respect of ‘Commercial Training or Coaching Centre’ implied that an activity
could not be commercial in nature but intention to take it up could be, which
was not apparent in the case.

Against this, the Revenue contended that distinction between
‘education’ and ‘training’ was baseless relying on the decision in the case of
JMC Educational and Charitable Trust v. CCE, (2008) 12 STT 308 (Chennai-CESTAT)
where pre-deposit amount was demanded.

It was finally held that the appellant were imparting higher
education and conferred degrees recognised by law and had recognition from
various State Governments and UGC and as such, these services provided by
institutions registered under the Societies Registration Act for educational
purposes were outside the purview of the definition of commercial coaching. The
decision in the case of Great Lakes Institute of Management Ltd. V. CST,
(2008) 12 STT 306 (CESTAT–Chennai) was relied upon. The longer period was not
found invokable as the brochures and information available through website, etc.
Proved that evasion was not the intention.

5. Import of service :

ABS India Ltd. V. Commissioner of Service Tax, Bangalore,
2008 (13) STR 65 (Tri.-Bang.)

The appellant, an Indian company, booked orders for sale of goods manufactured by its subsidiary situated in Singapore and received certain commission for which they paid service tax initially. The appellant argued that service was deemed to be provided abroad as it could not be considered as delivered in India when the recipient was located abroad. Relying on Blue Star Ltd. v. Commissioner, 2008 (11) STR 23 (Tribunal), it was held that if the recipient is located abroad, the company situated abroad utilised the benefit of the service rendered by the Indian company was exported service and therefore not liable for service tax.

Unitech Ltd. v. CST, Delhi 2008 (12)STR752(Tri.-Del.)

The issue in this case related to:

i) Whether the definition of architect under the Act is capable of covering persons not registered as architects in India?

ii) Whether the assessee is liable to pay service tax as receiver of service?

It was held that definition of architect services under the Act is wide enough to cover commercial concerns engaged in rendering services in the field of architecture and therefore, the recipient received taxable services of architect for the purposes of the Finance Act, 1994.

The Tribunal further held that although comprehensive provisions for taxing import of services came when S. 66A was introduced on 18-4-2006and import rules were notified by Notification No. 11/2006-ST from 18-4-2006,but the taxable services provided in India by a foreigner or a non-resident not having any office or business establishment in India to any person in India are liable for service tax even prior to 18-4-2006 u/s.66 read with S. 65(105) of the Act by virtue of Rule 2(1)(d)(iv) of the Service Tax Rules, 1994 read with Notification No. 36/2004-ST, dated 31-12-2004issued u/s.68(2) of the Finance Act, 1994 as recipient in India was liable for service tax with effect from 1-1-2005.

6. Refund:

K. C. Enterprises v. Commissioner of Central Excise, Vadodara 2009.(13) STR 39 (Tri.-Ahmd.)

The appeal was filed on the ground that during the period, the appellant had paid service tax for the amount billed for the services rendered rather than the amount actually received. The appellant was required to produce invoicewise details, date of receipt of actual amount along with cheque numbers or mode of payment, instead of merely submitting monthwise details showing amount billed and received. Further, the appellant failed to substantiate its claim by not submitting TR-6 challan with relevant documents and evidences of payment of tax to enable refund sanctioning. The appeal therefore was rejected.

Some Recent Judgments

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Service TaxI. HIGH COURT :

    1. Whether bottling of liquor amounts to packaging service ?

    Maa Sharda Wine Traders v. UOI, 2009 (15) STR 3 (MP)

    In this case, the question arose as to whether bottling of liquor amounted to packaging activity, liable for service tax considering that alcohol is not dutiable under the Central Excise Act (although it is liable under the State Excise Laws). The appellant among various others had filed a writ in the High Court primarily to challenge constitutional validity of the definition of packaging activity [S. 65(76b) of the Finance Act, 1994]. However, it was felt that justice would be done even on adopting apposite interpretative process whereby conclusion could be reached as to whether bottling of liquor could be treated as service liable for service tax or treated as ‘manufacture’ u/s.2(f) of the Central Excise Act and therefore, not liable under the service tax law. After doing a detailed analysis of the terms ‘manufacture’ and ‘excisable goods’ and considering the Department’s clarification vide CBEC Circular No. 249/1/2006-CX-4, dated October 27, 2008 in consonance with the statutory provisions as well as the law laid down by the Apex Court in Sir Shadilal Distillery and Chemical Works v. State of Uttar Pradesh, (1998) 8 SCC 428, it was held that bottling of liquor being incidental or ancillary to the completion of a manufactured product was ‘manufacture’ for the purpose of S. 2(f) of the Central Excise Act and since this is excluded from the definition of ‘packaging activity’ under the service tax law, it was held as not liable for service tax. Decision in the case of Vindhyachal Distilleries Pvt. Ltd. 2006 (3) STR 723 (LMP) was accordingly overruled.

    Note :

    The case has been reported in the July issue of BCAJ under the citation SOM Distilleries Pvt. Ltd. & Ors v. UOI & Ors., 2009 TIOL 292 HC MP ST LB. It may be noted further that to render the decision ineffective prospectively, Budget 2009 has sought to amend the definition of ‘business auxiliary service’ by excluding ‘manufacture of excisable goods’ instead of mere ‘manufacture’ in terms of S. 2(f).

    2. Penalty :

    CCE Jalandhar v. Darmania Enterprises, 2009 (14) STR 741 (P&H)

    The Commissioner in this case enhanced the penalty imposed by the Assistant Commissioner while exercising revisional power u/s.84 of the Act from Rs.1,000 to Rs.31,652. The Commissioner also recorded suppression. However, the Tribunal set aside revision order and restored the original order by observing that leniency considered in view of S. 80 did not suffer any illegality and therefore, could not have been interfered by the revisional authority. The Court observed that since no evidence was produced before the revisional authority to prove fraud, misrepresentation, etc., no jurisdiction was acquired by the authority to impose penalty and dismissed the appeal stating that no question of law arose for determination of the Court.

II. TRIBUNAL :

    3. Binding precedent :

    S. V. Colour Lab v. CCE, 2009 (15) STR 231 (Tri. Bang.)

    The issue of excluding cost of paper, chemicals, etc. being covered by the Tribunal decision in case of Shilpa Colour Lab & Others v. CCE, 2007 (5) STR 423 (Tri.-Bang), the Tribunal held that finding of the Commissioner (Appeals) that the Tribunal decision was distinguishable was wrong and against the judicial discipline and allowed the appeal.

    4. Cargo Handling Service :

    ITW India Ltd. v. CCE, Hyderabad 2009 (14) STR 826 (Tri.-Bang)

    The issue in this case related to whether packaging viz. strapping of steel items, a part of manufacturing process which already suffered excise duty, was chargeable to service tax as cargo handling service. Packaging activity was brought under service tax only from 16-6-2005 and the assessee paid service tax from this date. The decision of the Calcutta Tribunal in the assessee’s own case reported at 2007 (8) STR 490 as well as B. K. Thakkar’s case 2008 (9) STR 542 (Tri.) were distinguished. Relying on the Rajasthan High Court’s decision in the case of S. B. Construction Co. v. UOI, 2006 (4) STR 545 (Raj.), wherein it was held that when goods are packed for transport, it should be followed by transportation of the same in order to be covered by cargo handling service. It was held that later amendment in the definition of cargo handling service also linked service of packaging together with transportation of cargo and therefore, demand of service tax under the category of cargo handling service was not sustainable.

    5. CENVAT Credit : Document for availing credit :

(i) CCE Vapi v. Jindal Photo Ltd., 2009 (14) STR 812 (Tri.-Ahd.)

    Credit was taken based on invoices not containing registration number of Input Service Distributor (ISD) viz. the head office of the appellant. However, the receipt of services was not in dispute. Considering that the omission took place when relevant rules were being implemented, credit was held as admissible in terms of the proviso to Rule 9(2) and Rule 14 of the CENVAT Credit Rules.

(ii) Rohit Surfactants P. Ltd. v. CCE, 2009 (15) STR 169 (Tri.-Del)

    Holding that the words ‘directly and indirectly’ used in relation to ‘manufacture’ in the definition of input service had to be given very wide meaning, and relying on the decision in the case of Keltech Energies Ltd. v. Commissioner, 2008 (107) STR 280 (Tri.), it was held that banking & other financial services, general insurance service and courier agency service are to be treated as input service; stay petition was allowed.

6. Chartered Accountant’s Service — whether explanation had retrospective effect ?

    Sridhar & Santhanam v. CCE (ST) Chennai, 2009 (14) STR 756 (Tri.-Chennai)

    Exemption under Notification 59/2002-ST was not extended to a C.A.s’ firm by applying explanation in Notification No. 15/2002-ST re-trospectively. The Notification did not indicate retrospective effect in specific terms, so it was held that the amendment had to be held effective from the date of issue of Notification. Observing that the benefit available on plain reading could not be made retrospective by issuing Notification, the appeal was allowed.

7. Penalty: Levied  u/s.78, whether reducible?

CCE, Mumbai v. Ria Travels & Tours (I) Pvt. Ltd., 2009 (15) STR 124 (Tri.-Mum.)

In this case, the assessee was registered as a travel agent for its multi-locational business. On investigation by DCCEI authority, short payment of service tax was discovered. After upholding the service tax liability as demanded in the SCN, the Divisional Bench was divided on the view of levying penalty u/s.78. The Member Judicial held that in terms of the decision in the case of CCE&E v. Ashish Vasantrao Patil, 2008 (10) STR 5 (Born), the Tribunal has the power to reduce the penalty imposed u/ s.80. The fact that only in one out of twenty branches, the infraction was brought on record, the penalty of Rs.50 lakh in place of Rs.10 cr. would meet the ends of justice. However, the other Member dissented and per majority decision, it was held that mandatory penalty u/s.78, was not reducible as held by the Supreme Court in the case of UOI v. Dharmendra Textile Processors, 2008 (231) ELT 3 (SC) where the suppression was found deliberate. It was further held that the non-obstante S. 80 provided for NIL penalty in case of bonafide belief. The Member Judicial however did not hold that there was bona fide belief. Citing Dharmendra Textile Processor (supra), it was further observed that the Court could interpret the law and not legislate the same and accordingly, the wordings of the statute in S. 78 had to be given full effect by virtue of which the penalty had to be equal the amount of short payment. As such, the penalty of Rs.10 cr. was held as sustained.

8. Valuation:

Sky Gourmet Pvt. Ltd. v. CST, Bangalore 2009 (14) STR 777 (Tri.-Bang.)

The appellant’s services being those of supply of food, beverages, etc. to airlines, were registered as outdoor catering service provider. Supply of food was claimed as exempt under Notification No. 12/ 2003-ST and on which due VAT was paid. Demand was made to receive service tax on gross receipts and agreeing to grant only abatement under Notifications 20/2004-ST and 1/2006-ST but not benefit under Notification No. 12/2003-ST. Invoices evidencing sale were available on records. Considering both the Notifications as mutually exclusive and relying on BSNL v. UOI, 2006 (27) STR 161 (SC), the appellant’s right to avail option of more beneficial Notification was upheld.

Some Recent Judgments

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Service Tax

I. High
Court :


1. Clearing
& Forwarding Agent :



CCE (Bangalore-I) v. Mahavir
Generics, 2010 (17) STR 225 (Kar.) The
Tribunal in this case had held that the assessee could not fall in the category
of C & F agent as their services did not include both clearing and forwarding
operations. The case is reported at Mahavir Generics v. Commissioner,
2006 (3) STR 276 (Tri.-Del.) and it was widely followed by the Tribunals in
various decisions subsequently. Consequently, the Revenue appealed to the High
Court.

The Revenue contended that while
interpreting the meaning the language employed in the statute itself shall
prevail over the dictionary meaning and submitted that in this regard, the
Tribunal ought not to have travelled beyond interpreting the Section and also
relied on Karnataka Power Transmission Corporation Ltd. & Another v. Ashok
Iron Works Pvt. Ltd., (2009 AIR SCW 1502). While the respondent referring to
Prabhat Zarda Factory (India) Ltd. v. CCE, Patna 2006 (2) STR 784
(Tribunal) contended that this decision was overruled by the Larger Bench in the
case of Larsen & Toubro v. CCE, Chennai 2006 (3) STR 321 (Tri.-LB) and affirmed
by the P&H High Court in the case of CCE v. United Plastomers,
2008 (10) STR 229 (P&H), the Tribunal was fully justified in allowing the
appeal.

The agreement of the party with
their principal was discussed in detail. In accordance with the agreement, the
assessee in addition to the other services also provided services of storage and
distribution and also decided the price of the goods on mutual consultation and
could also appoint stockists and dealers for the goods. The Court observed that
the assessee’s contentions were not acceptable mainly on account of the fact
that the assessee was named ‘consignment agent’ in the agreement and therefore
parties were ‘ad-idem’ when the contract was entered into as to what
their status would be and that the assessee was authorised by their principal to
appoint stockists, dealers and agents on their behalf and it was not a case of
mere commission agent but had responsibility of getting the goods stored by
clearing them and forwarding them to stockists, etc. If they were mere
commission agents, these charges would not have found place in the contract.

The Tribunal further observed
that in the case of L&T (supra) only the activity of procuring purchase
orders was involved and such activity was covered under BAS and would not fall
in the category of C & F agents. Similar facts existed even in the case of
United Plastomers.

The High Court also observed
that reliance could not be placed on the decision in the case of CCE,
Jalandhar v. Kulcip Medicines (P) Ltd. 2009 (20) STT 263 (P&H), as while
pronouncing the judgment of the said case reliance was placed on the Tribunal
order of the above case without consideration that the order of the Tribunal in
the above case was not final as the Revenue had preferred an appeal to the High
Court.

As regards the definition of C &
F agent, the Court ruled that even though the definition of Commission Agent is
defined under the Business Auxiliary Services, the interpretation of the clause
tantamount that the definition is also covered under C & F. Further it held that
the definition of C & F was an inclusive one and would cover activities rendered
by the assessee. Hence the appeal was decided in favour of the Revenue.

II. Tribunal :

2.
Auto dealer providing space to finance companies —
whether a BAS ?



M/s. Tribhuvan Motors Ltd. v.
Commissioner of Service Tax, Mangalore, 2010 TIOL 57 CESTAT
(Bang.)

The assessee, an authorised
automobile dealer, was registered under service tax. The Revenue contended that
he was also liable under the category of business auxiliary services (BAS) as he
was promoting the business of the financial institutions situated in his
premises. The assessee contended that no promotion was made by them and they
only gave a table space to the financial institutions and relied on the
decisions in the case of Silcon Honda v. CCE Bangalore, 2007 (7) STR 475
(Tri-Bang.) and CCE v. Chadha Auto Agencies, 2008 (11) STR 643
(Tri-Bang.).

Moreover the Tribunal observed
that there was no dispute with the fact that the assessee only provided table
space and was not promoting the business of the financial institution and
following the ratio in Chadha Auto Agencies (supra) allowed the appeal.



3. CENVAT
Credit :



HPCL v. CCE (Mangalore),
2010 (17) STR 426 (Tri- Bang.)

The assessee, engaged in the
business of refining crude and marketing of petroleum products, sought
registration under the category of storage and warehousing service. In
accordance with S. 3 of the Essential Commodities Act, oil companies are under
obligation to transport petroleum products in specified manner and area.
Pipelines are considered ideal for transportation of crude oil. The
transportation was done by PMHB, a joint venture company specifically promoted
for rendering services of transportation, which charged service tax to the
assessee. The assessee utilised such CENVAT credit for discharging the output
liability. The transportation for the crude oil was simultaneously done for
three other companies also along with the assessee. CENVAT was disallowed as it
was used for others as well.

The Tribunal held that as explained by the learned advocate, the transportation of the products of all the entities together was so done due to techno-logical necessity. Moreover, the Commissioner also stated that the transportation of goods belonging to the assessee in the pipeline was related to the business of the assessee. As the assessee’s case was strong, full waiver of pre-deposit was granted.

T. G. Kirloskar Automotive Pvt. Ltd. v. CCE (Bangalore), 2010 (17) STR 359 (Tri-Bang.)

The assessee was denied CENVAT credit of service tax paid on transportation provided to the employ-ees from their place of residence to factory and vice-versa, relying on the decision of M/s. Stanzen Toy-otestsu India Pvt. Ltd.

Accepting the assessee’s contention that the above-mentioned decision was set aside by the Divisional Bench in the case of M/s. Stanzen Toyotestsu India Pvt. Ltd. v. CCE as reported in 2009 (14) STR 316 (Tri-Bang.) and relying on CCE v. Cable Corporation of India Ltd., 2008 (12) STR 598 (Tribunal) 2008 (87) RLT 783 (CESTAT-Mum.), the assessee’s case was held covered and the appeal was allowed.

Skyline Builders v. CCE (Calicut), 2010 (17) STR 437 (Tri-Bang.)

The assessee rendered goods transport agency service and claimed the benefit of abatement under Notification No. 1/2006, dated March 1, 2006. The assessee was denied abatement on the ground that they had claimed credit also. It was contended by the assessee that CENVAT credit was later reversed. The Tribunal held that in the given circumstances, the abatement could not be denied and pre-deposit was granted.

CENVAT Credit : Whether any time limit applicable for taking credit ?

Pierlite India Pvt. Ltd. v. CCE (Ahmedabad), 2010 (17)
STR 237 (Tri-Ahmd.)

The assessee had taken CENVAT credit in November 2006 for the input services paid during the period January 2005 to October 2005 and plead-ed that no time limit has been prescribed for taking the credit and placed reliance on Coromandel Fertilisers Ltd. v. CCE (A), Visakhapatnam, 2009 (239) ELT 99 (Bangalore) and on Para 3.5 of the CBEC manual. Further the assessee at the time of taking the credit gave all the details of the transactions in writing in November 2006. The Revenue admitted that there was no time limit in the law for availment of credit but relied on the M/s. J. V. Strips Ld. v. CCE, Rohtak, 2007 (218) ELT 252 (Tri.-Del.) and CCE (Hyderabad) v. M/s. Mould-tek Technologies Ltd., 2006 (205) ELT 415 (Tri-Bang.) for extension of time limit for issuing the SCN.

The Tribunal held that the decision relied on by the Revenue in the case of J. V. Strips was pronounced by a Single Member, while the decisions relied on by the assessee are of Divisional Benches. Further the decision of Coromandel Fertilisers was pronounced on 26-8-2008, whereas the decision of J. V. Strips on 26-7-2007. It also observed that the decision of Mould-tek could not be followed as the same Bench had rendered the decision in Coromandel Fertilisers at a later date. In view of the above cases and that the assessee had written a letter in November 2006 clearly ruled out the invocation of extended period and allowed the appeal.

 4.   Consulting Engineer : Whether covers execution of processes ?

Ravi Paints & Chemicals v. Commissioner of Service Tax (Chennai), 2010 (17) STR 354 (Tri-Chennai)

The assessee provided the services of processing of raw material, periodical testing of raw materials, finished products, exercising quality control and maintaining machinery used for manufacturing of dry cement paints of M/s. Brilliant Coating Pvt. Ltd.

The Revenue contended that the assessee was covered under the Consulting Engineer’s service as noticing any defects and the requirement of pointing out them that has to be set right would involve advisory/consultancy services and reliance was placed on Nokia (I) Pvt. Ltd. v. Commissioner of Customs, Delhi (2006 (1) STR 233).

The Tribunal held that the nature of the services did not warrant any consultancy or advisory services. Moreover the Tribunal stated that the decision of Nokia should not be interpreted in narrow sense that in case the engineers are appointed for a certain job it has to be technical consultancy. Hence the assessee was held as not covered under the said service.

 5.   Construction of complex — (a) whether con-struction service or works contract service (b) whether entitled to 100% credit or 20% ?

M/s. Puravankara Projects Ltd. v. Commissioner of Service Tax, Bangalore, 2010 TIOL 28 CESTAT BA

The assessee was engaged in the activity of construction and was registered under the commercial or industrial services and construction of complex services and also registered under Works Contract for the purposes of VAT. The Revenue contended that the assessee should be registered un-der the category of Works Contract for service tax. The Tribunal following the ratio of the decision in the case of Die-bold Systems Pvt. Ltd. v. CST, Chennai 2008 TIOL 489 CESTAT Mad. held that the assessee was already discharging the liability under the existing category for the period prior to 1-6-2007, when the works contract category was introduced, hence was not required to take fresh registration under works contract. Further the Tribunal also ob-served that the main activity of construction of flats and sale by the assessee per se did not involve any taxable service and therefore any ancillary activity forming part of the main activity could not be subjected to tax as works contract service. The various other services rendered by the assessee and the Tri-bunal’s observation on the same were as under :

  1)  Health and Fitness service : The assessee also constructed a gym in the residential complex and had charged the owners of flats. The Revenue contended that such services were covered under the Health & Fitness service and attracted service tax. The Tribunal stated that the facility was owned by the flat-owners and the assessee did not render any health & fitness service. Hence the same could not be considered as liable for service tax.

2)    Real Estate Agent’s service : The assessee had entered into an agreement with the prospective buyers for the flats under construction.
The prospective buyers on their own accord would find other prospective buyers and sell the flat to them. In such a transaction the assessee collected transfer fee from the prospective buyers under the term of the agreement. The Revenue contended that the service pertained to real estate agency. The Tribunal stated that the consideration received as transfer fee could not be considered as real estate agent’s service.

3)    Maintenance of Repair service : The assessee maintained flats constructed till such time they were transferred to the association of owners of the flats. In order to maintain the flats the assessee recovered expenses from the flat owners. Relying on the CBEC Circular that the reimbursable expenditure cannot form part of the value, the Tribunal held that reimbursement of such expenses was not subject to service tax.

The Revenue had also disallowed the input credit on the ground that the assessee should be allowed only 20% credit as the assessee rendered exempt services. The Tribunal held that the consideration received for transfer of right could not be considered exempt services and as such, the assessee could claim 100% CENVAT credit.

In view of the above observations, the Tribunal granted complete waiver and stay.

 6.   Custom House Agent (CHA) : Whether freight forwarding activity a part of CHA service ?

DHL Lemuir Logistics Pvt. Ltd. v. CCE (Bangalore), 2010 (17) STR 266 (Tri-Bang.)

The assessee registered as CHA according to the Revenue did not pay service tax on certain revenue streams. The assessee contended that he rendered two kinds of services (a) consolidation of cargo activities, and (b) CHA activity. The assessee also submitted a flow chart describing in detail the flow of services rendered by him. The services that were not included were :

a)    Charge collect fees (CCX fees) : The fees pertain to collection and remittance of freight to in-ternational air and water carriers. It was held that the services so rendered are not covered by CHA’s services.

 b)   Break bulk fees : In case when cargo was transported from outside India to India, margin was paid to the assessee and in the case when cargo was transported from India to outside India the assessee would have paid the margin and hence this was not covered as CHA’s service.

c)    Profit share from origin : In case of imports/ exports transactions made through third party as done in break bulk fees, margin was paid. This also was not considered as CHA’s services as break bulk fee itself is not CHA’s service.

d)    Unallocated income : Charges collected for various services are accounted into respective revenue heads on raising of the invoice on the customer. Later in case of any modification, correction, reversal of charges the entries are passed through the unallocated income head. Hence the amounts under this head do not relate to CHA’s services.

 e)   Currency adjustment factor : This is collected as part of freight in order to cover the ex-change rate fluctuations and hence this does not pertain to CHA’s services.

 f)   Air/sea rebate : Air or ship carriers offer bulk space quota and the assessee is booked as the shipper and later the assessee collects the amount from the customers and the difference between the two rates is air/sea rebate. The nature of the amount is not covered as CHA’s services.

  g)  Commission/brokerage : IATA is a worldwide trade association of the international air transporters. The assessee being registered with IATA can sell the air cargo transportation to the passenger and receives commission as a percentage of freight booked. Similarly it renders services for shipping industry and these charges do not relate to CHA’s services.

  h)  Air freight incentive : Air carriers offer incentives in the quantum of cargo booked and hence the services are not related to CHA’s services.

i)   Expenses, reimbursement billing : Charges are collected for expenses such as delivery charges, priority handling charges, courier charges, break bulk fees, statistical charges, etc. In case of such charges if margin is charged they shall be included in CHA’s services.

Hence the order was remanded to the Original Au-thority for determining the liability in the light of observations made by the Tribunal on various services and further directed to obtain CA certificate.

(Note : Readers may note that any kind of commission or brokerage income would be taxable as business auxiliary service while acting on behalf of a client at relevant time).

  7.  Jurisdiction :

CCE (Guntur) v. Integral Construction Company, 2010 (17) STR 380 (Tri-Bang.)

The assessee was providing the services of blast hole drilling, blasting, excavation, loading, transportation, dumping, etc. in the mines in Madhya Pradesh and accordingly, the services were covered under the category of site formation and clearance excavating and earthmoving demolition services. The SCN, however, was issued by CCE, Guntur.

The assessee in this case did not have centralised registration and therefore, technically for his various premises, he required separate registration. In the instant case, the Tribunal dismissed the appeal on the issue of jurisdiction based on the decision in the case of Ores India Ltd. v. CCE, 2008 (9) STR 157 (Tri.-Kol.).

    8. Leasing of stalls : Whether taxable as Business Exhibition service ?

Karnataka Exhibition Authority v. CCE (Bangalore), 2010 (17) STR 296 (Tri-Bang.)

The assessee’s service of leasing of stalls during Dassera festival to the highest bidder was held taxable in revision order. Further, the assessee did not provide any direct service to the lessees of the stalls. The Tribunal held that the leasing of the stalls was not covered as Business Exhibition services and was allowed.

  9.  Management Consultancy : Whether ERP implementations covered ?

M/s. IBM India Pvt. Ltd. v. Commissioner of Service Tax, Bangalore, 2010 TIOL 167 CESTAT Bang.

The assessee provided services in relation to implementation and adoption of ERP software and did not pay service tax thereon. However in respect to their services of planning and advise relating to ERP, they discharged the liability under the category Management Consultancy services and the Revenue also agreed to this. In respect of services relating to implementation and adoption of ERP, according to the assessee they were covered under the Information Technology Software services effective from May 16, 2008 and the Revenue wanted to cover it under the Management Consultancy services. Reliance was placed on BCCI v. CST, [2007 (7) STR 384 (Mumbai-Tribunal)], Glaxo Pharmaceuticals [2005

    ELT 171 CESTAT] and inter alia stating that in case of introduction of a new category, it is implied that the service was not taxable earlier.

The reasons highlighted were that the services were not in connection with the management of the organisation, the services should not be covered in the inclusive definition of management service and moreover the services rendered being of executory were not covered. Reliance was inter alia also placed on CCE, Mumbai-IV v. AISCO Engineering Pvt. Ltd., 2006 (5) STJ 171 (Tri-Mum.). The assessee also contended that prior to September 20, 2004 these services were exempted from service tax and with effect from September 10, 2004 the services were specifically exempted from the definition of consulting engineer’s service and that the exemption was removed only on the introduction of the new ser-vice of information technology from May 16, 2008. Reliance was placed on the case of Federal Bank Limited (2009 TIOL 584 CESTAT Bang.). The Tribunal relying on this decision and other decisions held that the services of implementation and adoption of ERP was not covered under the category of management consultancy services but was squarely covered as IT software service introduced from 16-5-2008.

   10. Business Auxiliary Service : Money Transfer Service : Whether taxable ?

Muthoot Fincorp Ltd. v. CCE (Bangalore), 2010 (17) STR 303 (Tri-Bang.)

The assessee, an NBFC having network in vari-ous states entered into an agreement with Weiz-mann Forex Ltd., Cochin (WFL) which represented Western Union Financial Services Inc. (Western Union). The assessee provided money transfer service. The Revenue held that the service was a Business Auxiliary Service (BAS) and since it was rendered to a party in India there was no ‘export’.

The assessee contended that it was not covered under BAS as it did not promote the services of money transfer, but only displayed the publicity material given to them and it should be covered under the Banking and Financial services which covers transactions of money transfer with effect from May 01, 2006. Hence as the specific service came into force on May 01, 2006, the same could not be taxed from a prior date. Alternatively, if it was covered under the BAS, then Export Rules could exempt the service as one of the conditions stipulated by the Export Rules is that the services should be used outside India. The Tribunal ruled that even if the agreement was between the assessee and WLF, the beneficiary of the transaction was Western Union and the services so rendered by the assessee were utilised by Western Union outside India and hence this condition of the Export Rules was satisfied.

Further as regards the condition of receipt of consolidation in convertible foreign exchange, the Tribunal relied on Nipuna Services Ltd. v. CCE&ST, Hyderabad, 2009 (14) STR 706 (Tri-Bang.) that the condition was only applicable to Rules 3(1) and 3(2) of the Export Rules at given time. In case it was to be made applicable to Rule 3(3), then the Notification would have expressed so, but the Notification only mentioned Rule 3(1) and Rule 3(2) and the ap-peal was allowed accordingly.

   11.  Penalty : Not leviable when bona fide belief of non-taxability exists :

CCE (Ludhiana) v. Instant Credit, 2010 (17) STR 397 (Tri-Bang.)

The assessee acted as a Direct Sales Associate (DSA) and was therefore liable to service tax under the category of Business Auxiliary services and did not obtain registration as it had a belief as to non-taxability. However, on officers visiting the premises and insistence as to liability, the assessee paid service tax when the SCN was issued and pleaded for relief in penalty on bona fide belief. Since the Department did not have evidence of the assessee having intention of suppression, the Tribunal did not interfere with the decision of the Commissioner (Appeals) and held that no penalty was leviable.

Vista Infotech v. Commissioner of Service Tax, Bangalore, 2010 (17) STR 343 (Tri-Bang.)

The authorities noticed that the assessee, even though collecting service tax, did not deposit the same and pleaded financial hardship on account of non-payment by a major client. The assessee appealed against penalty and not against the confirmation of liability and interest and relied on the Board Circular No. 137/167/2006-cx-4, dated 3-10-2007 and further relied on the Tribunal’s decision in the cases of Essar Steel Ltd. v. CCE&C (Su-rat), 2009 (13) STR 579 (Tri-Ahmd.); Vee Aar Secure v. Commissioner of Service Tax, Bangalore, 2009

    STR 50 (Tri-Bang.) and V.S.T. Tillers Tractors v. Commissioner of Central Excise, Mysore, 2009 (14) STR 159 (Tri-Bang.).

Observing that the assessee regularly paid the tax for the earlier period and the fact that the liability was discharged before the end of the proceedings, the assessee was held entitled to relief u/s.73(3) and relying on the judgments cited above, no penalty was held leviable.

   12. Refund : Service tax paid on input services for period prior to 18-4-2006 :

Polyspin Ltd. v. CCE (Tirvunelveli), 2010 (17) STR 441 (Tri-Chennai)

The Commissioner (Appeals) upheld the order of the adjudicating authority for recovery of refund considering it as erroneously granted for input services not liable for service tax. The recovery proceedings were ordered for the refund of tax paid for the period prior to April 18, 2006, the date on which S. 66A came into effect when the assessee was not liable to tax. The Tribunal held that the refund could not be denied on the mere ground that the assessee was not liable to tax and hence the appeal was allowed.

    13. Valuation : Material sold by advertising agency :

CCE (Chennai) v. Elegant Publicities, 2010 (17) STR 263 (Tri-Chennai)

Scanning charges and publicity material charges collected from customers by an advertising agency were contended by the Revenue as part of taxable service.

The assessee contended that they had not done any preparation, visualisation or conceptualisation of the publicity material but only purchased and sold the same to the customer. Since this was not successfully rebutted by the Revenue, it was held that mere sale and of publicity material is not a taxable service and similarly scanning also is not covered under the advertisement services.

Valuation : Material supply :

Hindustan Aeronautics Ltd. v. Commissioner of Service Tax (Bangalore), 2010 (17) STR 249 (Tri-Bang.)

The assessee undertook repair and overhauling of various engines received from the Ministry of Defence and others. The adjudicating authority concluded that the assessee did not discharge the correct service tax liability and the documents did not reflect the payment of sales tax on the value of material. The assessee submitted that in an identical issue in their own case, a final order was passed by the Tribunal in 2010 (17) STR (Tri-Bang.), the only difference being it was in the case of their helicopter division. Further the assessee submitted that they had availed the benefit of Notification 12/2003 and the same could not be denied. The invoices captured the material and labour cost separately and the documentary evidence of payment of sales tax was also provided. The Tribunal after considering the documentary proof of payment of sales tax held that the assessee could not be denied the availment of benefit of Notification 12/2003 and consequential relief was granted.

Part B — Some recent judgments

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Service Tax

An important Larger Bench decision : Services provided by service providers from outside India :



Hindustan Zinc Ltd. v. CCE, Jaipur 2008 TIOL 1149 CESTAT
Del. LB [2008 (11) STR 338 (Tri.-LB)]

1. Background :


1.1 The law relating to Service Tax is contained in Chapter V
of the Finance Act, 1994 (The Act) as amended from time to time. Service Tax
Rules, 1944 (The Rules) contain machinery provisions in terms of the Act. S. 68
of the Act deals with payment of Service Tax i.e., who shall pay the tax
and the manner. For easy reference S. 68 is reproduced below :

S. 68 :



“(1) Every person providing taxable service to any
person shall pay Service Tax at the rate specified in S. 66 in such manner and
within such period as may be prescribed.


(2) Notwithstanding anything contained in Ss.(1), in
respect of any taxable service notified by the Central Government in the
Official Gazette, the Service Tax thereon shall be paid by such person and in
such manner as may be prescribed at the rate specified in S. 66 and all the
provisions of this Chapter shall apply to such person as if he is the person
liable for paying the Service Tax in relation to such service.”



1.2 Thus the general rule is that person providing taxable
service is the person liable to pay Service Tax. However, U/ss.(2) of S. 68, a
clause is contained which provides that in case of ‘notified’ taxable services,
any other person as may be prescribed is liable to pay Service Tax.

1.3 In the year 2002, a new sub-clause (iv) was inserted in
Rule 2(1)(d) of the Rules with effect from 16-8-2002 (vide Notification
12/2002-ST) which reads as under :


“Rule
2(1)





(d) Person liable for paying Service Tax means —


(iv) in relation to any taxable service provided by a
person who is non-resident or is from outside India and does not have any
office in India, the person receiving taxable service in India”.



1.4 Later i.e., on December 12, 2004, the Government
issued Notification No. 36/2004-ST to come into effect from January 01, 2005
wherein persons other than service providers were specifically notified
u/s.68(2) of the Act. This inter alia also included taxable service
provided by non-resident or person from outside India and who did not have an
office in India.

1.5 Thus, the dispute related to whether the liability to pay
Service Tax could be fastened on the recipient of taxable service from January
01, 2005, the date of issue of Notification No. 36/2005-ST or August 16, 2002,
the date from which Rule 2(1)(d)(iv) was prescribed.

2. In the above background, a single member Bench of Delhi
Tribunal in the case of Aditya Cement v. CCE, 2007 (7) STR 153 in the
context of Rule 2(1)(d)(iv) observed that :

“It is well-settled law that the rules are
subservient to the Sections and if Sections do not provide for discharge of
tax by the recipient of services from non-resident having no office,
then it would be futile exercise to rely upon the rules to collect the tax”
(emphasis supplied). It also stated as follows :

“If the contention of the learned SDR is to be accepted,
then there was no necessity for the Government to issue Notification No.
36/2004-S.T. notifying the service receiver from non-resident having no
office, to pay Service Tax, as receiver. By issuing the said Notification, the
Central Government intended to tax the service receiver from non-resident,
with effect from 1-1-2005, which, in corollary would be that no Service Tax is
payable by this category prior to 1-1-2005.”

The above decision was followed by a Division Bench in case
of Ispat Industries Ltd. v. CCE, 2007 (8) STR 282 (Mum). Doubting the
correctness of these decisions in case of Samcor Glass Ltd. v. CCE, Jaipur-1
Delhi 2007 TIOL 935 CESTAT Del while hearing the stay application the Bench
observed as follows :

“Thus, the person receiving the service from abroad was by
the said clause 2(d)(iv), made liable to pay Service Tax in respect of taxable
services received. This clause is clearly relatable to the provisions of S.
68(2) which contemplates making of such provision under the rules, as is clear
from the word ‘prescribed’ which means ‘prescribed under the rule’. The
statutory effort so created cannot be reduced to a subsequently issued
notification repeating the contents of clause (iv) under sub-heading (B).
The learned Single Member has however taken a different view, while the
Division Bench has not taken into consideration the provisions of Rule
2(d)(iv) of the Rules . . . . . . We do not want to pre-empt the course of
referring the matter to the Larger Bench that may be adopted by the Bench
hearing this appeal” (emphasis supplied).

It however further observed :

“The expression ‘taxable service’ occurring in clause (iv)
of Rule 2(d) is to be understood in the concept of taxable service which are
enumerated in S. 65(105) of the Act and therefore, this Rule will apply to all
taxable services. Prima facie, there was no need to make any further
Notification to repeat what was already prescribed by the said Rule.”


3. The Larger Bench, in misc. order No. CT/85/08 analysed S.
68(2) as follows :

3.1 S. 68(2) according to the Larger Bench could be broadly
divided into two parts :

  • The first part envisages specifying ‘services’ in relation to which a person other than service provider is to be made liable. Accordingly, these services have to be identified and specified and this could be done by way of issuing notification.

  • The second part envisages specifying the person liable to pay service on such service notified as per the first part. This is done by the Rules already prescribed.

According to the Bench, it was not an acceptable contention that the manner of collection of tax could be extended to include the person liable to pay the tax. It observed:

“The person liable to pay is an integral component of any tax – as a concept distinct from the mechanism for its collection and recovery.”

3.2 Thus,  combined    reading of Notification 12/2002 notifying  Rule 2(1)(d)(iv) and Notification 36/2004 notifying various persons other than service providers including non-residents or persons from outside India liable for Service Tax, would be necessary as both the notifications complemented or supplemented each other and in the absence of either, Service Tax could not be collected or received in respect of specified services. It is required to note that the levy is on rendering of taxable service and not on a person. No sooner than the taxable event takes place, tax must be collected and therefore provision has to be made to fasten the liability to pay Service Tax.

The Bench stated that the first part of the requirement of S. 68(2) had to be carried out by way of notification and the latter could be implemented by making rules. It also stated:

“It is well known that where the law provides the manner for doing something, it should be done in that manner or not at all”.

3.3 In the context of Rule 2(1)(d), it observed “sub-clause (d) of Rule 2 is the definition clause of the Service Tax Rules. The definition clause cannot be read as a substantive provision creating liability much less in a tax statute.”

Referring to Notification No. 36/2006-ST, it observed, “the service specified in Part B was omni-bus, namely, ‘any taxable service’, meaning thereby all types of taxable services provided by a person who is a non-resident or from outside India and does not have any office in India, the recipient became liable for paying Service Tax.”

The Bench also opined that in case of services provided from abroad, the service provider could not be made liable to pay Service Tax and brought un-der the tax net in absence of apparent mechanism for collection and recovery of tax from them. A different provision had to be made.

3.4 The appellant relying on Laghu Udyog Bharti v. UOI, 1999 (112)ELT 365 (SC) argued that provisions of Rule 2(d)(xii) and (xvii) of the Rules were struck down on the ground that the scheme of the Finance Act created charge on the person collecting service tax, whereas Rule 2(d)(xii) and (xvii) treated customers as the assessees, This clearly was in conflict with S. 65 and S. 66 of the Act. The Revenue on the other hand relied on the decision in the case of Gujarat Ambuja Cements Ltd. v. UOI, 2005 (182) ELT 33 (SC) and argued that amendments made with retrospective effect in this regard were upheld and therefore it could not be relied upon. The Bench observed that the Rule 2(1)(d)(xii) and (xvii) were held illegal in Laghu Udyog Bharti’s case (supra) because of charging provisions provided otherwise. When charging Section itself was amended to make the Act and the Rules compatible, criticism of the earlier law upheld by the Court cannot be availed of and that the Legislature was competent to remove infirmities and validate what was declared invalid. However, there was no question of the Finance Act, 2000 overruling the decision of the Court in Laghu Udyog Bharti as the law itself was amended.

3.5 The Revenue also referred to the explanation inserted at the end of Ss.(105) of S. 65 with effect from 16-6-2005. The Bench stated that explanation was a temporary measure to tax imports of services and was subsequently replaced by S. 66A. However, in the opinion of the Bench, the issue involved in the case had no relevance with the explanation.

There being  no dispute as to the service involved viz. the  consulting engineer’s service as taxable service, any reference  to the erstwhile explanation in S. 65(105) was held  as misplaced by the Bench.

3.6 In summation, it was held that recipient of taxable service could be held as liable for paying Service Tax only from 1-1-2005 and express concurrence to the decisions in the cases of Aditya Cement and Ispat Industries (supra) was also made.

Some Recent Judgments

I. Supreme Court :


    1. Penalty :

    Whether levy of penalty can be considered by Court while considering quantification of penalty under a civil appeal ?

    Commissioner of Central Excise, Haldia v. Exide Industries Ltd., 2010 (19) STR 291 (SC)

    The appellants tried to challenge the levy of penalty in the civil appeal filed for its quantification. The Supreme Court rejected the appeal observing that the Tribunal had rejected the appeal for levy of penalty against which the appellants did not appeal. The Court did not express any opinion on merits.

II. High Court :

2. Penalty :

    Whether penalties u/s.76 and u/s.78 can be imposed simultaneously for the same default ?

    Commissioner of C.Ex. Chandigarh v. City Motors, 2010 (19) STR 486 (P&H)

    The Adjudicating Authority levied penalty on the assessee u/s.76 and u/s.78 for the same default. In the first appeal, penalty u/s.78 was reduced and penalty u/s.76 was set aside and this decision was affirmed by the Tribunal. In the Revenue’s appeal to the High Court, it was held that penalty u/s.78 is sufficient to cover the default and two penalties for the same default cannot be imposed.

3. Import of services :

    Can service tax be levied on firms or body corporate under consulting engineer’s services prior to 1st May, 2006 ?

    Commissioner of Service Tax, Bangalore v. Araco Corporation, 2010 (19) STR 169 (Kar.)

    The Department, in appeal, claimed that the respondent providing technical assistance and know-how to an Indian company should be liable to service tax under the category of ‘consulting engineer’s services’ for the period from November, 1998 to December, 2000.

    The assessee contended that S. 65(31) dealt with the definition of ‘consulting engineer’ not the taxability thereof and the term ‘body corporate and any other firm’ in the said S. 65(31) was introduced only w.e.f. 1st May, 2006 and therefore, in the period prior to this date, the category applied only to individuals.

    Secondly, the assessee also claimed that S. 65(31) applied only to an Indian service provider and the foreign service provider is liable to service tax only after the introduction of S. 66A w.e.f. 18th April, 2006.

    According to the Court, reference to S. 65(31) being irrelevant was not acceptable and even on assuming its applicability, it applied only to services of Indian consulting engineers.

    Holding that during the disputed period, the definition did not apply to a firm or body corporates and reverse charge also did not apply prior to 18th April, 2006, the Department’s appeal was dismissed.

    [Author’s Note : The term ‘an engineering firm’ was always there in the definition introduced with effect from 7-7-1997. Therefore, the conclusion is based on misquoted legal provision. However, primarily reverse charge did not apply prior to 18-4-2006 and therefore, it would not impact the decision based on misquoted legal provision.]

4. Liability to pay service tax :

    Whether liable when the services are provided by the principal ?

    Commissioner of Central Excise v. P.C. Paulose, 2010 (19) STR 487 (Ker.)

    By an agreement with Calicut Airport Authority Ltd., a right to collect entrance fees from visitors was provided to the assessee and therefore, the service tax was demanded from them. The demand was confirmed in the first appeal. The Tribunal’s order that the Airport Authority was rendering service and not the respondent was challenged by the Department.

    The High Court held that once licence was given by the Airport Authority to the respondent to permit entry and allow enjoyment of services provided to the visitors, the respondent was a service provider though he was acting only as an agent and liable for service tax.

5. Recovery of dues :

    Can the Department directly recover dues from principal employer u/s.87 ?

    ONGC Ltd. v. Dy. Commissioner of Cus., C. Ex. & S.T., Rajahmundry 2010 (19) STR 164 (AP)

    The Department was of the view that even though no assessment order was passed, manpower supply agencies were liable for assessment and since ONGC made substantial payment to them, notice u/s.87 of the Finance Act, 1994 could be issued on principal employer directing it to remit the payment.

    ONGC Ltd. contended that it was not required to pay service tax in respect of payments made to manpower supply agencies and in absence of any assessment order, the question of directing the principal employer to pay service tax liability did not arise. The High Court observed that the authorities have the responsibility of collecting data and pass an assessment order. Only if there’s a failure or default in payment by the assessee, the Department has the option to call the principal employer in terms of S. 87 of the Finance Act, 1994. Without an assessment order in place, service tax was not crystallised and therefore, S. 87 could not be invoked.

6. Search & seizure :

    Whether Revenue could retain the amount collected during search or seizure in absence of liability being crystallised ?

    Naresh Kumar & Company v. Union of India, 2010 (19) STR 161 (Cal.)

    Search was carried out in the petitioners’ premises and various records and documents were seized. The petitioners claimed that they were compelled to handover cheque of Rs 15 lakh to protect against service tax liability.

    The High Court held that the trial judge did not decide the matter in the right direction and the actual issue was whether the Department could re-tain this amount under the provisions of law. While examining communication with the Department, it could be concluded that the payment was not voluntary and no provisions in the service tax law could justify compulsory payment of service tax in advance. Therefore, no amount could be withheld and the Department was bound to return the same with interest @ 9% per annum.

        7. Storage & warehousing:
    Whether service tax is applicable on compensation received from Government for storage of free-sale sugar?

    Commissioner of C. Ex., Chandigarh v. Nahar Industrial Enterprises Ltd., 2010 (19) STR 166 (P & H)

    A manufacturer of sugar was directed by the Gov-ernment to maintain buffer stock and was also compensated towards storage, interest, insurance charges, etc. by way of subsidy. The Revenue contended that buffer subsidy was taxable under ‘storage and warehousing services’.

    The High Court observed that the respondent stored its own stock in buffer and therefore, there is no service provider and service-recipient relationship emerging as one cannot provide service to his own self. Further, the subsidy was meant as compensation for loss of interest, insurance, etc. and not for rendition of any service. The respondent could not be construed as ‘storage and warehouse keeper’ and Government could not be held as its ‘client’ and accordingly, the appeal was dismissed.

    III. Tribunal:

        8. CENVAT credit:
        i)     Whether CENVAT credit is allowable fully to a service provider having a trading activity in view of Rule 6(3) of CENVAT Credit Rules, 2004?

    Orion Appliances Ltd. v. Commissioner of Service Tax, Ahmedabad 2010 (19) STR 205 (Tri.-Ahmd.)

    The appellant engaged in providing repairs and maintenance services and commissioning and installation services was taking full CENVAT credit on advertising, security, courier, telephone and banking services. However, these input services were being used for providing repairs and maintenance services and trading activities. The Department contended that the appellant is liable to pay service tax for excess CENVAT credit availed in respect of trading activities in terms of Rule 6(3) of CENVAT Credit Rules, 2004.

    The appellant contested that Rule 6, requiring maintenance of separate books of accounts, applies only to an assessee engaged in providing exempted as well as taxable services and trading activities cannot be considered as exempted services and therefore, Rule 6(3) did not apply to him.

    The Tribunal accepted that trading activity was not a service and therefore, Rule 6(3) did not apply. However, full CENVAT credit could not be availed by the appellant as CENVAT credit of input service requires one to one correlation with output services. Therefore, the appellant had to choose and segregate the quantum of input service attributable to trading activity and exclude the same from availment of CENVAT credit. Since the quantum could not be ascertained in advance, the appellant should calculate such amount once in a quarter or every six months. The matter was remanded for quantifying the amount of reversal, if required, after giving an opportunity to appellant.

        ii) CENVAT credit: Outward transportation up to the place of removal when sale is for destination at customer’s premises:

    L. G. Electronics (India) Pvt. Ltd. v. Commissioner of C. Ex., Noida 2010 (19) STR 340 (Tri.-Del.)

    The appellant availed CENVAT credit of service tax on GTA service in respect of outward transportation of finished goods from factory gate to the customer’s premises or from factory to depots and from depots to customer’s premises. However, the department contended that the outward transportation from place of removal i.e., factory gate or depot to customer’s premises was not covered within the definition of ‘input service’ under Rule 2(l) of CENVAT Credit Rules, 2004.

    The appellant contended that in all the cases, the sales to dealers, whether from factory gate or depots, was on FOR basis. Therefore, the goods were transported at the appellant’s risk and sale took place at customer’s premises and the customer’s price included the transportation cost.

    Since the words ‘place of removal’ are not defined in CENVAT Credit Rules, they must be understood as defined by S. 4 of the Central Excise Act where-under the customer’s premises are considered as the place of removal. The credit in respect of GTA services for transportation from factory gate to depots should not be denied as the sales are held to be made from depots. In terms of Circular No. 97/8/07-ST dated 23-8-2007, CENVAT credit of GTA services up to customer’s premises were available to the appellant. Even if duty was paid on MRP-based valuation, credit of GTA services could be taken in terms of Circular No. 137/3/2006-CX-4, dated 2-2-2006.

    The Department contended that in case of payment u/s.4A, Board’s Circular No. 97/8/07 ST, dated 23rd August, 2007 was irrelevant and CENVAT credit could not be availed by the appellant. U/s.37(2)(xvii) of the Central Excise Act, Central Government is entitled to make rules for credit of service tax as well as excise duty. Since there was no nexus between manufacture and input service, outward transportation from the place of removal could not be regarded as ‘input service’. The scope of CENVAT Credit Rules, 2004 could not travel beyond the scope of provisions of the Central Excise Act.

    The Tribunal in turn observed that the Department’s contention that input duty credit is available only in respect of services used in or in relation to manufacture in terms of S. 37(2) of the Central Excise Act and that “in case of conflict between provisions of the Act and provisions of Rule, provisions of the Act shall prevail” does not hold good for reasons that in Bombay Tyre International Ltd. 1983, the Supreme Court held that it was not acceptable that because the levy of excise was on manufacture, the value of excisable goods must be limited to manufacturing cost and profit only. Referring to the basic principle of value added tax and valuation aspect, since all expenses up to place of removal were included in assessable value, the Tribunal observed that the whole scheme of Central Excise levy is to be kept in mind rather than interpreting Rule 2(l) of CENVAT Credit Rules, 2004 and S. 37(2) of Central Excise Act in isolation. The contention of the Department that the duty was paid u/s.4A was found baseless as availability of credit and valuation for payment of duty were found to be two independent issues as explained vide Circular No. 137/3/2006. Since the matter was decided exparte, the case was remanded back to the Commissioner to examine whether the sale was on FOR destination basis and if this was found to be the fact, direction was provided to allow credit up to customer’s place.

        iii) Outdoor catering service used in the factory not an input service

    Commissioner of C.Ex., Chennai v. Sundaram Brake Linings, [2010 (19) STR 172 Tri-Chennai]

    There were 13 appellant manufacturers to the issue involving availment of CENVAT credit on outdoor catering service disallowed holding that they were not used for manufacturing excisable products. Applying decision of GTC Industries 2008 (12) STR 468, the appellate authority allowed the credit.

    The Department contended before the Tribunal citing the case of CCE, Nagpur v. Manikgarh Cement Works, 2010 (18) STR 275 that in order to fall in the definition of input service, the service must be used in or in relation to manufacture directly or indirectly and outdoor catering service had no nexus with the manufacturing activity.

    The appellants relied on the decision of GTC Industries (supra) and contended that it was rightly followed by the first Appellate Authority and since the value of catering service formed a part of cost of production, the same was to be considered as an input service. The Tribunal stated that the Central Government is empowered to frame rules for grant of credit of duty of service tax and held that outdoor catering service cannot be considered as input service and restored the original order deleting however, penalties imposed by the original authority.

        iv) Whether CENVAT credit allowable on invoices in the name of branch, not registered under service tax?

    Manipal Advertising Services Pvt. Ltd. v. CCE, Mangalore 2010 (19) STR 506 (Tri-Bang.)

    The appellant provider of advertisement services was disallowed credit on invoices addressed to branch offices both by original and Appellate Authorities.

    The appellant referred to Rule 4(2) of Service Tax Rules, 1994 which provided that in case of centralised billing or centralised accounting system, in respect of any services, the assessee had the op-tion to register the premises or offices from where centralised billing or central accounting system was located. Accordingly, the appellant got registered its premises on the ground that they had centralised billing or central accounting system. Reliance was placed on the case of Stadmed Pvt. Ltd. 1998 ELT 466 wherein credit of duty was allowed on invoices addressed to branch offices. However, according to the Department, in absence of centralised registration, credit in respect of inputs used at branches was not admissible.

    The Tribunal held that since the appellant discharged service tax liability, the benefit of CENVAT credit could not be denied on the ground that invoices were in the name of branch. The appeal was allowed.

        9. Stay of pre-deposit:

    Whether appellant is engaged in providing business auxiliary services?

    Jetlite (India) Ltd. v. Commissioner of C. Ex., New Delhi 2010 (19) STR 209 (Tri.-Del.)

    The appellant took over M/s. Sahara Airlines Ltd. (SAL) and added the category of ‘business auxiliary services’ in March, 2007 in service tax registration. The Department demanded `128 crore of service tax for the period from July, 2003 to January 2007 under the said category and interest and penalty of the same amount.

    The appellant had entered into an agreement with Sahara India Commercial Corporation Limited (SICCL) in 1995 to promote business of SICCL of housing and real estate projects through printing it on air tickets. Consideration was paid based on per ticket.

    SAL accounted the money received as ‘operational revenue’. However, SICCL recorded the same as ‘project work in progress’ as it was a capital expenditure.

    The Department contended that SAL being already registered with Service Tax authorities ought to have disclosed material facts in the ST-3 return. However, the appellant had taken opinion on 4th August, 2003 in regard to the present activity and therefore, was under a bona fide belief. Therefore, the appellant relisted invoking of extended period of limitation.

    According to the appellant, they merely used logo of SICCL and as per agreement, no brochures or other arrangements to popularise the business was carried out. The difference between promotion of sale of goods and use of brand was explained and the appellant claimed that the entire consideration was only towards display of logo.

    The Tribunal observed that:
    Levy and collection of tax is regulated by law and not by contract. The term ‘service’ has a variety of meanings, but has to be construed depending on the context in which it is used. An activity provided individually or integrally would not make any difference as to its charge. The character of service does not change with permutation or combination of services and the nature of services does not alter if certain clauses of agreement are not fulfilled. No evidence was led to prove that use of logo was not helpful to promote real estate business of SICCL. The information of SICCL’s projects was supplied purposely to air travel passengers.

    There was no case made out to show that undue hardship would be caused to the appellant if no full waiver was granted. Noting Ravi Gupta’s case 2009, wherein it was held that if prima facie it appears that the demand raised would not stand, the assessee should not be compelled to pay full or substantial part of the demand. The appellant was directed by the Tribunal to make pre -deposit of `100 crore within eight weeks of the date of receipt of the order staying the balance demand.

Some Recent Judgments

I. High Court :

    1. Beauty parlour service :

    Whether carrying out activities of electro homoeo-pathy consultation and certain other related activities, such as hair bonding/hair weaving, sale of wigs, clips etc. were covered under ‘Beauty treatment services’ ?

    Commissioner of Central Excise, Mangalore v. Beau Monde’s Clinic, (2009) 21 STT 326 (Kar.)

    The appellant carried on activities of electro homo-eopathy consultation and had allegedly undertaken certain other related activities, such as hair bonding/hair weaving, sale of wigs, clips, etc. The original authority raised demand under the category of ‘Beauty Parlor Services’ on the contention that these activities would fall within ambit of ‘Beauty Treatment’. The Commissioner (Appeals) ruled in favour of the appellant. However, further appeal was preferred by Revenue in CESTAT. The Tribunal agreed with the detailed reasoning by Commissioner (Appeals) in his order, elaborating reasons why these activities of the assessee would not fall under ‘Beauty Treatment’ and ‘Beauty Parlor Service’. Finding no merit for interference, the appeal was dismissed by the High Court.

    2. Refund :

    Whether refund of Service Tax can be granted when service tax is paid under wrong assumption in spite of not rendering any services and where credit notes have been issued by the assessee ?

    Shiva Analyticals (I) Ltd. v. Commissioner of Service Tax, Bangalore, (2009) 21 STT 328 (Kar.)

    The appellant claimed refund of service tax u/s.11B of the Central Excise Act, 1944 on contending that service tax was originally paid inadvertently considering that they were liable to pay service tax. Original authority allowed refund on finding that appellant had not rendered any service. The Order was revised by the Commissioner directing to re-credit the refund as the same was erroneously gran-ted. On appeal by the appellant, CESTAT allowed the appeal relying upon the decision in case of Mohd. Ekram Khan & Sons v. Commissioner of Trade Tax, (2004) 6 SCC 1083 and held that since the appellant issued credit notes towards refund of service tax to its clients, refund order passed by the original authority was legal and proper. On appeal by the department calling for interference in the order of CESTAT, the Hon’ble Court held that the order was perfectly legal and valid, and did not call for interference as no questions of law much less the substantial questions framed in the appeal arose for consideration.

II. Tribunal :

    3. CENVAT Credit :

    CENVAT credit reversed on being pointed out non-admissibility.

    3.1 CST Ahmedabad v. Amola Holdings P. Ltd., 2009 (16) STR 46 (Tri.-Ahd.)

    Respondent was providing commercial construction service and as such paid service tax at abated rate under Notification No. 1/2006-ST dated 1-3-2006. He also availed CENVAT credit. However, on being pointed out that benefit of abatement was available only on the condition of non-availment of CENVAT credit, voluntarily reversed credit taken but not utilised and also paid interest. Commissioner (Appeals) relying on Chandrapur Magnet Wires (P) Ltd., 1996 (81) ELT 3 SC set aside the pe-nalty proposed by the revenue. Revenue challenging this, contended that once credit is availed, they became ineligible for abatement of 67% and subsequent reversal would not help as exemption Notification has to be strictly construed and relied on Supreme Court’s decision in Bombay Dyeing’s case [2007 (215) ELT 3 (SC)]. However, distinguishing the facts of the case of Bombay Dyeing (supra) and relying on the decision in the cases of Precot Mills Ltd. 2006 (201) ELT 356 (Tri.-Chennai) and Hello Minerals Water (P) Ltd. 2004 (174) ELT 422 (All.), it was held that since credit was not utilised and precedent decision holding exemption squarely applied to the respondent, revenue’s appeal was rejected.

    3.2 GHCL Ltd. v. CCE, Bhavnagar 2009 (16) STR 89 (Tri.-Ahmd.)

    Appellant was disallowed CENVAT credit of service tax paid on services utilised prior to 10-9-2004 and service tax paid on credit card services, security services, repairs and maintenance services, etc. Factually, security service was used for plant, residential colony and mining and was also evident as per invoice dated 1-11-2004. The contract for repairs and maintenance services pertained to period from 1-9-2004 to 31-8-2005. Since security service was one of the sixteen services covered by Rule 6(5), the credit was considered admissible and proportionate credit in case of repair service after working out was considered admissible for the period 10-9-2004 and 31-8-2005. In case of credit card services, for want of details and the invoice being in the name of individual, credit was disallowed. Appeal accordingly was remanded for limited purpose of working out proportionate admissible credit.

    3.3 Whether debit note is an admissible document for allowance of credit.

    Pharmalab Process Equipments P. Ltd. v. CCE, Ahmedabad 2009 (16) STR 94 (Tri.-Ahd)

    The Tribunal in this case observed that debit notes contained all relevant information required under Rule 9(2) of the CENVAT Credit Rules and therefore, the credit in principle was admissible based on such document which was not named as ‘invoice’. However, the matter was remanded to the original authority as there was no clarity whether the authority had verified the same documents which were presented before the Tribunal. Directions were issued to verify the documents and ensure receipt of service after allowing opportunity to appellant to present the case.

    4. Classification : Exclusion under one entry — Whether could be taxed under another entry ?

    Kiran Motors Ltd. v. CCE, 2009 (16) STR 74 (Tri.-Ahmd.)

The appellant is an authorised service station of Tata Motors. vehicles and receives reimbursements for providing free service to customers during warranty period. Revenue demanded service tax u/ s. 6S(10S)(zzb) treating the service as business auxiliary service. Since the services provided by the appellant   are  in respect  of servicing/repairs    of vehicles  as authorised  service  station  services,  the ‘-   services  are classifiable  u/s.6S(10S)(zo)  as authorised  service  station  service  and  not  under  sub-clause (zzb) as contended  by revenue.  Under  sub-clause  (zo), only motor  cars,  light  motor  vehicles and two wheelers are included and commercial vehicles are not included. The appellant paid service tax in respect of motor cars etc. and the demand of the revenue was only in respect of light commercial vehicles. Relying on the Board’s Circular No. 87/ OS/2006-ST dated 6-11-2006 and Code 36.02 in the Master Circular No. 96/7/07-ST dated 23-8-2007, it was held that transport vehicles were clearly excluded from the category of authorised service station; it could not be brought to tax under another general category of business auxiliary service.

5. Intellectual property service: Services rendered in 1990 – whether payments in installments relevant to hold the service as taxable?

Modi Mundipharma    P. Ltd. v. CCE, Meerut 2009 (15) STR 713 (Tri.-Del.)

Appellant, a manufacturer of medicines under an agreement with a Swiss Company received ‘know-how’ in the form of information, data, drawing, secret formula etc. under its own brand name in India and paid royalty for a period of 10 years or more for the know-how. Service tax was demanded on royalty payment paid as receiver of intellectual property service. After perusing the agreement and Show Cause Notice, the Tribunal accepted the contention of the appellant that there was no finding as to receipt of know-how continuously. Payment whether made lumpsum or on deferred basis for know-how received in 1990 could not determine the liability of service tax as no service was provided during the disputed period and allowed the appeal. Since the appeal was allowed on this short ground, other aspects of the applicable date for ‘reverse charge’ etc. were not gone into.

6. Mandap Keeper’s    service:

When a hotel rented out rooms along with gardens, whether room rentals were liable for service tax under ‘Mandap Keeper Service’ ?

Merwara Estates v. Commissioner of Central Excise, Jaipur (2009) 21 SIT 327 (New Delhi CESTAT)

The appellants were running a hotel with gardens adjacent to it. They were renting the gardens for the purpose of various functions and for which they were registered as Mandap Keeper and were paying service tax accordingly. The appellant on few occasions, also rented hotel rooms simultaneously with the garden for the purpose of stay of people arriving for the functions. The appellant’s contention was that service tax was not payable on that portion.of the charges realised which is attributable to renting of hotel rooms. Revenue cited the decision of the Tribunal in the case of Rajmahal Hotel v. CCE, (2006) 3 SIT 75 (New Delhi CESTAT) in support of department’s case.

The Tribunal held that the decision in the case of Rajmahal Hotel (supra) only authorised levy of service tax on renting of halls attached to the hotels but not in respect of renting the hotel rooms. Renting hotel rooms for the purpose of stay was not covered under ‘Mandap Keeper Service’. Hence the view taken by the Tribunal earlier that the appellants were not liable to pay service tax in respect of charges recovered for renting of the hotel rooms was confirmed.

7. Outdoor catering service:

Preparation and serving food in company premises whether can be considered outdoor caterer’s service?

Rajeev Kumar Gupia v. CCE, Jaipur 2009 (16) STR 26 (Tri.-Del. )

Appellant cooked and served food in the canteen of a corporate where place for canteen, kitchen storer, furniture, electricity and even gas stove were provided by the company. The contract also provided for payment for advance to the appellant. It was held to be not liable as outdoor caterer’s service as appellant merely prepared and served food.

8. Penalty:

Not leviable  when  bonafide    belief exists.

8.1 Jay Canesh Auto  Centre v. CCE, Rajkot 2009 (15) STR 710 (Tri.-Ahd.)

Appellant, an authorised auto dealer paid service tax with interest before issue of Show Cause Notice and pleaded that on account of confusion as to liability under business auxiliary service on incentive received, did not pay such service tax. However, on receiving clarification from CBEC vide Circular No. 87/05/2006-ST of 6-11-2006, they paid service tax and therefore, penalty u/ s.78 be set aside by extending benefit u/ s.80. Penalty u/ s.78 was set aside.

8.2. Krunal Catering Service v. CCE, Vadodara 2009 (15) STR 716 (Tri:-Ahd.)

Appellant ran a canteen in a factory in the rural area and provided meals to employees. They were ignorant of liability of service tax as outdoor caterer as they merely ran a canteen. On learning about it, they paid service tax with interest. Revenue levied penalty u/ s.78 on the ground that ignorance of law could not be the excuse. According to the Tribunal, section 80 could come into play in the circumstances as the belief as to non-applicability of service tax was bonafide and accordingly, penalty u/ s.78 was set aside.

Some recent judgments

I Supreme Court :

    1. Grant of stay pending disposal of case.

        Ø Ravi Gupta vs. Commissioner of Sales Tax, Delhi 2009 TIOL 47 SC-CT.

    For want of declaration forms, demand for over 8 crore was made on appellant, a dealer registered under the Delhi Sales Tax Act, 1975. The appellant prayed for further time to produce declaration forms, which was declined and on failing to get any relief, the appellant moved the Tribunal in six appeals. Along with the appeal, application to dispense with pre-deposit was filed. The Tribunal after hearing rival stands and particularly that declaration will be filed, directed payment of three crore rupees. The appellant filed a writ before the Delhi High Court questioning correctness of the order. The High Court directed the petitioner to produce statutory forms within six weeks and failing to do so, directed to pre-deposit in terms of the order. As the appellant did not produce the records, the Tribunal held that the appellant was required to pre-deposit three crore rupees as directed earlier and as the appellant failed to do both, appeals were held as not entertainable. A writ was again filed questioning correctness of the order, which was dismissed by the order on the ground that earlier order was not complied with. This order was challenged in appeal to the Supreme Court, wherein it was pleaded that the Tribunal and the High Court failed to appreciate that large number of declaration forms were to be collected from various parties and since the situation was beyond the control of the appellant, the forms could not be produced. If the forms are taken into account, the liability would not be more than 15 lakh.

    After examining the relevant provision, the Hon’ble Court observed that though discretion is available, it has to be exercised judiciously. These things are to be considered by the Tribunal while dealing with application for dispensing with the pre-deposit — prima facie case, balance of convenience and irreparable loss. The Court noted, “Merely on establishing a prima facie case, interim order of protection need not be passed. But on a cursory glance, if it appears that the demand has no legs to stand, it would be undesirable to require the assessee to pay full or substantive part and dispose of petition in a routine manner. Merely because the Court has indicated the principles, that does not give a licence to the forum/authority to pass an order which cannot be sustained on touchstone of fairness, legality and public interest. Where denial of interim relief may lead to public mischief, grave irreparable private injury or shake a citizen’s faith in the impartiality of public administration, interim relief can be given ! !”

    The Tribunal was accordingly directed to hear the appeal on merits without insisting on any pre-deposit. However, no opinion was expressed on the merits of the case and the appeal was disposed of.

II High Court — Important decisions :

2. CENVAT Credit : Credit for service tax paid on outward freight.

Ø Ambuja Cements Ltd. vs. Union of India and Others 2009 TIOL 447 STR 3 (P&H) — order dated February 10, 2009.

    Readers may refer to the decision of Delhi CESTAT reported at 2007 (6) STR 249 (Tri.-Del.) against which instant appeal was filed by the appellant on substantive question of law i.e., whether service of transportation up to the customer’s doorstep in the case of ‘for destination’ sales where the entire freight was paid and borne by the manufacturer would be ‘input service’ for Rule 2(1) of CC Rules and whether interest should have been demanded on the same ?

    The Hon’ble Court examined and relied on these aspects, the definition of ‘place of removal’ as provided in Section 4(3)(c)(iii) of the Central Excise Act, 1944, the subsequently issued Board’s Circular No.97/6/2007-ST, dated 23.08.2007 (Master Circular) and the definition of input service as per Section 2(1) of the CC Rules — ‘Place of removal’ means a depot, a premise of consignment agent or any other premises or place where excisable goods are sold after the goods are cleared from the factory. Para 8.2 of the Board’s Circular (supra) contemplates fulfilment of certain conditions; (a) ownership of goods and the property of the goods should remain with the seller till the delivery of goods in acceptable condition at the doorstep of the purchasers, (b) the seller bears the risk of loss or damage in transit to destination, (c) the freight charge should form integral part of the price of goods.

    Binding nature of the Board’s Circular also was recognised by the Court relying on the decision of Paper Products Ltd. vs. CCE, (1999) 7 SCC 84 which in turn had relied inter alia on earlier SC decisions like Usha Martins Industries (1997) 7 SCC 47 and Ranade Micro Nutrients vs. CCE (1996) 10 SCC 387 and that the Revenue precluded from challenging the correction of the Circular even on the ground that is inconsistent with statutory provisions.

    Further, the Hon’ble Court examined that all the requirements of the Circular were fulfilled —the supply of cement was ‘at destination’. Freight and insurance were borne by the appellant. Referring to the reply filed by the appellant to show-cause notice, the Court ruled that the third condition of freight charge forming part of cost of excisable goods stood fulfilled and thus the service of transportation was ‘input service’ for the CC Rules and accordingly, the credit availed was ruled to have been lawfully availed and there being no contravention of law, consequential interest payment did not arise.

3. Broadband connectivity — liable for VAT as sale of light energy although taxable to service tax.

Ø Bharti Airtel Ltd. vs. State of Karnataka & Others 2009 TIOL 99 HC — KAR-VAT

Vide an order dated January 16, 2009 the judgment in this case has given rise to controversy and uncertainty as the broadband connectivity charge recovered by the appellant is held as ‘sale of light energy’ taxable under the Karnataka VAT Act on the entire sale proceeds in spite of being taxed to service tax and principle laid down by the Supreme Court in the landmark decision of Bharat Sanchar Nigam Ltd. vs. UOI, 2006 (2) STR 161 (SC) is distinguished. The Assessing Authority in this case issued twelve notices under the Karnataka VAT Act (KVAT) to reassess the turnover of the appellant by adding subscription received towards leasing of broadband by treating the same as ‘transfer of right to use goods’ on the ground that physical lines of optical fibres were goods and rejecting appellant’s contention that leasing of broadband was a service on which service tax was paid. The demand was confirmed through a reassessment order on the new ground that the appellant was selling light energy. The appellant’s writ against the order was allowed by way of remand for fresh disposal. Twelve fresh notices were issued proposing to treat the transaction of providing broadband service as ‘sale of light energy’ and then were reassessed treating the leased service as sale of light energy. The Assessing Authority while deciding the case had also observed that there is no express provision in the service tax law that no VAT could be levied on a transaction on which service tax was levied nor does KVAT law contain a provision as to non-levy of VAT on a transaction on which service tax was levied by the Central Government. The appellant strongly relied on the decision of BSNL (supra), State of U.P. and Another vs. Union of India and Another 2003 TIOL 14 SC-ST, Associated Cement Company Ltd. vs. Asst. Commissioner of Sales Tax, Jabalpur and Another 1971 (28) STC 629 and a few other decisions and contended that the order of reassessment was opposed to the decision in the case of BSNL (supra) and that the activity of transmission of data from one place to another through optical fibre cables (OFC) did not involve sale of ‘light energy’ to the subscribers of broadband. What is delivered by the broadband users is data or voice information in electronic wave form and the light emitted by the laser device in the transmitter is used only for transmitting the same data at the destination point and that there was no element of ‘sale’ as Artificially Created Light Energy (ACLE) could not be termed as ‘goods’ as defined under Article 366(12) of the Constitution of India, under Section 2(7) of the Sale of Goods Act, 1930, Section 2(15) of the KVATAct, 2003, as it does not possess any of the properties of goods. The ACLE which is the electronic magnetic wave of high frequency is not capable of being possessed, stored, delivered and marketed and therefore, it cannot be held as goods was contended relying on the decision in the case of BSNL (supra), wherein it was held that ‘goods’ do not include ‘electro magnate waves’ or radio frequencies for the purpose of Article 366(29A)(a). Per contra on behalf of the Revenue, it was contented that the principle enunciated in BSNL’s case (supra) cannot be applied to this case, as it had not considered ‘artificially created light energy’ and placing strong reliance on the decisions of the Supreme Court in (1) Associated Cement Co. Ltd. vs. CC (2001) 4 SCC 493 (2) Tata Consultancy Services vs. AP (2005) 1 SCC 3208 – 2004 (178) ELT 22 (SC) and (3) State of A.P. vs. NTPC & Others (2002) 5 SCC 203. It was further contended by the Revenue that artificially created light energy is capable of being abstracted, possessed and consumed and as such, it could be held as ‘goods’ for the purposes of Article 3661(12), Section 2(7) of the Sale of Goods Act, 1930 and Section 2(15) of the KVAT Act, 2003. The definition of ‘goods’ under these laws was examined in detail by the Hon’ble High Court and it observed that in the decisions of TCS (supra) and ACC (supra), the term ‘goods’ as used in Article 366(12) is very wide and includes all types of properties whether tangible or intangible/ any incorporeal property and accordingly it was held that software sale was sale of goods as it was capable of being extracted, consumed and used and it could be transmitted, transferred, delivered, stored and possessed, etc. The Hon’ble High Court ana lysed observations in the BSNL’s case as regards’ electromagnetic waves’ in detail and distinguished non-extinguishable electromagnetic waves from’ Artificially Created Light Energy: (ACLE)’ and noted that ACLE is made to travel in the confined area in OFC Network and direction of their movement is regulated and that the said light energy gets extinguished and it cannot be reused by the same subscriber for carrying his another data or of any other subscriber. Each specific data is carried by a separate ACLE and it could be safely held that it is being abstracted, possessed, transmitted and delivered during transmission of data to the subscriber  and like, in the case of electricity, the creation, supply, possession, use and transmission (movement) and delivery of ACLE takes place almost simultaneously. Rival submissions including expert opinions were placed on record by the appellant as well as by the Revenue. However, artificially created light energy was held as ‘goods’.

Further questions that were examined were – whether there is a ‘sale’ of ACLE by the appellant to its subscriber so as to attract VAT and whether VAT was leviable even if transmission was chargeable to service tax. The definition of ‘sale’ was considered, analysed and discussed at great length and it was held that the nature of the transaction between the appellant and its subscriber under ‘service line agreement’ though is described as ‘service’, is one of ‘composite transaction’ involving ‘service’ and ‘sale’ elements. With ACLE, the data and information of the subscribers cannot be transmitted by using only OFC network. Similarly, without using OFC network, the data/information cannot be transmitted by using only ACLE.

For composite transactions, again the Supreme Court’s observations in BSNL’s case were examined and an opinion was formed that in the instant composite transaction also, the two elements of service and sale cannot be split. In this frame of reference, relying on the decision in State of UP vs. UOI, 2003 TIOL 14 SC-ST, it was held that the entire proceeds received from the subscriber as ‘service rentals’ would have to be taxed under the KVAT Act treating the transaction of providing broadband connectivity to its subscribers as sale of Artificially Created Light Energy *(ACLE) and that the Government of Karnataka had authority to levy VAT on the entire proceeds collected as ‘lease rentals’, despite it being assessed to ‘service tax’ by the Central Government under the Finance Act, 1994.

[Note:    The above decision would have repercussions of serious nature if finality is reached for taxing a transaction twice].

4. Whether supply of vessels to ONGC amounts to a service in relation to mining?

Indian National Ship Owners’ Association & Others vs. UOI & Others, 2009 TIOL 150 HC Mum-ST.
 
Members of the petitioner provide vessels that include offshore drilling rigs, harbour tugs, construction barges, etc. to exploration and production operators such as ONGC in India and in international waters on time-charter basis to carry out various jobs which inter alia includes anchor handling, towing of vessel, supply to rig or platform, supporting offshore construction, piloting big vessels in and out of harbour, etc. When the taxing entry of service in relation to mining of mineral oil or gas was introduced with effect from 01.06.2007 (entry 65(105)(zzzy), the petitioner’s members on approaching service tax authorities were informed that services of supply of vessels to ONGC or the like companies were liable for service tax under the said taxing entry and actions were initiated for recovery of service tax and an instant writ was filed therefor. In the interim, the Finance Act, 2008 with effect from 16.05.2008 introduced entry (zzzzj) to tax service in relation to supply of tangible goods for use without transferring right of possession and effective control of such goods. Accordingly, the petitioner pleaded that the activity of the members was specifically covered by the new entry and since it did not relate to ‘mining’, it was not covered by the earlier entry and that the new entry was not carved out of the old entry. Reliance was placed on Pappu Sweets & Biscuits & An. vs. CIT, UP, (1998) 7 SCC 228 and Yogendra North Naskar vs. CIT, Calcutta, (1969) 1 SCC 555 and also on Glaxo Smithkline Pharmaceuticals, 2005 (188) ELT (TrL), Diebola Systems (P) Ltd. 2008 9 STR 546 (TrL) and a couple of others.

Attention of the Court was drawn to the fact that there existed taxing entries for services of transportation by aircraft, transportation by road and transportation of goods other than water through pipeline or conduit, but no specific entry exists for transportation by sea and, therefore, the activity could not be subjected to service tax.

Provisions of Section 65A, entry (zzzy) and entry (zzzj) along with the respective clarificatory Circulars of the Board were examined. Quoting from the judgment of the Assam Court in the case of Magus Construction P. Ltd. vs. UOI, 2008 TIOL 321 HC GIW-ST, the Court observed that tax on services is a new concept and the Government had adopted selective approach as against comprehensive approach and this distinction needs to be kept in mind as only specified services are taxable under such approach.

The Court further observed that the expressions ‘in relation to’ and ‘in respect of’ are words known as of ‘widest amplitude, but one has to keep in mind the context in which they are used’. The services rendered by a person must have a direct or a proximate relation to the subject matter of the taxing entry. Services having remote connection cannot be included in a taxing entry on the strength of the words ‘in relation to’. Applying this, it was held that entry (zzzzj), was not inserted by amending entry (zzzy) and the former is not the specie of what is covered by (zzzy) and no service tax could be demanded on the activity of supply of vessels under mining service.

5. When does the taxable event take place under the service tax law?

CCE&C Vadodara vs. Schott Glass India P. Ltd., 2009 TIOL 82 HC -AHM-ST 2009 (14) STR 146 (Guj).

The Revenue challenged the order of Ahmedabad CESTA T on the following questions:

o Whether or not in service tax the taxable event is realisation of payment for taxable services rendered and not the time of rendering service?

o Whether or not at the time of realisation of payment for the taxable service provided, the provisions of Rule 2(1)(d)(iv) come into force making the service receiver liable for service tax?

According to the Revenue, in the order in question, the CESTAT had overlooked the fact that service tax burden was shifted to the recipient of service from 16.08.2002 in terms of Rule 2(1)(d)(iv) for services provided by non-residents and the respondent assessee was required to pay service tax on the amount paid in September, 2003. Factually, CESTAT had found that services were rendered prior to March 2002 and at such time, there was no liability cast on the receiver of service. The Court observed that service tax is levied as provided in Section 64(3) of the Act to all taxable services provided or after commencement of Chapter 97 of the Act. Thus, taxable event is providing all taxable services defined by Section 65(105) of the Act. Merely for the fact that invoice was raised later and payment was made subsequently, the liability cannot be fastened. Neither the Section nor did the Rule even suggest that taxable event is raising of the invoice for making the payment. The Tribunal accordingly had decided in accordance with the law based on facts and material on record and there was no legal infirmity in the order.

III Tribunal:

CENV AT Credit  :

6. Service tax on accident policies, etc. allowable as credit?

Milipore India Ltd. vs. CCE, Bangalore, II 2009 TIOL 490 CESTAT-BANG.

The  issue    related to availment of CENV AT credit  of service  tax on the services of medical and personal accident policy,  group  personal accident policy, insurance personal vehicle services, landscaping of factory  and  catering bills. Definition of input  service in Rule 2(i) of CC Rules was examined vis-a-vis CAS-4 standards reproduced in the decision of GTC Industries Ltd. 2008 TIOL 1634 CESTAT-MUM-LB Since CAS-4 considered all the services like medical benefit, subsidised food, education and canteen bill, etc. to form part of the cost of final products, the services received should be treated as received in relation to manufacture. , Further, since modernisation, renovation, repair etc. of the office premises, etc. are also included in the broad definition of input service, even landscaping should be treated as in relation to manufacture of final product and accordingly, the credit on all the above services was allowed.

7. Erection of machinery at buyer’s place by a sub-contractor: Whether allowable?

CCEX Vapi IAlidhara Textool Engineers PI Ltd. vs. Alidhora Textool Engineers Ltd./CCEX Vapi, 2009 TIOL 370 CESTAT-AHM.

A manufacturer supplied, installed and erected machinery in buyer’s premises. An agency was outsourced to instal the machines and took credit of service tax paid on erection and commissioning services provided by the said agency. The question involved was whether installation done at buyer’s premise would be treated as input service for manufacturing as it was a post manufacturing activity. It was contended that commissioning and installation cost was included in the price of machines and duty was paid on the same and that part of the service was provided at buyer’s premises and a part at manufacturer’s. Copy of sample sales contract wherein erection and commissioning cost was included was produced. Commissioning was to be managed by the appellant-manufacturer. Sub-contractor was held to be service provider to manufacturer and it was held that CENV AT Credit Rules do not require that the service should be rendered at factory only for determining eligibility of service tax credit and accordingly, credit was allowed to the appellant.

8. Service provided by one person, tax paid by another – whether entitled for credit?

Federal-Mogul-Goetze (India) Ltd. VS., CCE, Chandigarh, 2009 TIOL 460 CESTAT-DEL.

Credit was taken by a manufacturer on the basis of TR-6 challan showing payment of service tax by the sister concern of the service provider. Service provider was not registered initially when service was provided. Hence, its sister concern which was registered paid service tax charged to the appellant for services provided through its sister concern. This fact was intimated to the Asst. Commissioner. However, no reply was received. Later even the unregistered service provider got registered and paid service tax with interest. It was held that TR-6 was a valid document based on which credit was taken. Since the service tax liability was dis-charged and later even service tax registration was obtained by the actual service provider, it was held that credit could not be denied.

9. Service tax credit on mobile phones or landlines at residence of staff admitted as CENV AT credit.

ITC Ltd. VS. CC&CE, 2009 TIOL 439 CESTAT- MAD
 
Relying on the decision of the High Court in the case of CCE VS. Excel Crop Care Ltd., 2008 (12) STR 436 (Guj.) and also the Tribunal decision in the cases of Indian Rayon & Industries Ltd. VS. CCE Bhavnagar, 2006 (4) STR 79 and Keltech Engineers Ltd. vs. CCE, Mangalore, 2008 (10) STR 280 and the case of CCE (LTU) Chennai VS. Braka India, 2009 (89) RLT 876, it was held to the effect that in the absence of express prohibition under CCR, service tax paid is admissible as the phones were not installed at the factory premises cannot be the ground germane to the provision of rates relevant for the purpose.

10. Whether credit for service tax paid on reimbursable expenses is allowed to be taken?

Chandra Shipping  & Trading Services vs. CCE & C, 2009 (13) STR 655 (Tri.-Bang).

The appellant, a Custom House agent was alleged to have wrongfully availed input credit for over 4 years and an amount of over 52 lakh plus interest and penalty under Sections 76 and 78 were demanded. It was contended that CENVAT credit returns were not verified by the Department. The credit was denied on the grounds that credit was taken on services not used and that no evidence was produced by the appellant that no credit was availed by importers/exporters for whom the services were used. The appellant contended that grounds on which credit was denied were extraneous to the CCR, which have to be interpreted strictly and credit could not be denied based on suspicion. Time bar also was pleaded. Benefit of time bar was granted to the appellant. Since the Revenue had not verified the facts, benefit of doubt was granted to the appellant. It was held that the burden of proof was on the Department to prove the allegations with solid evidence. Since the appellant had filed all its Returns regularly, the demand hit by time bar and the penalties were set aside.

11. Credit taken prior to payment for value of input service.

Gujarat Pipavav Port Ltd. vs. CCE Bhavnagar, 2009 (14) STR 53 (Tri.-AHD).

Service tax credit was availed one month earlier than permissible under Rule 3(1) of the Service Tax Credit Rules, 2002. Credit can be availed only after making payment for value of input service and the service tax shown in the invoice. The appellant pleaded technical lapse. Since in any case credit was available in the next month, interest for one month was required to be paid but penalty imposed was waived.

Part B — Some recent landmark judgments

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New Page 1

1.
Board’s Circulars when in
conflict with SC’s decision : Whether binding ?

Supreme
Court (Constitution Bench) :

CCE v. Bolpur Ratan Melting and Wire Industries, 2008
TIOL 194 SC-CX-CB :

(i) In this case, a Bench of three Judges of the Supreme
Court made a reference to a Larger Bench whereby observations made in the
decision of the Supreme Court in the case of Dhiren Chemical Industries, 2002
(2) SCC 127 were referred to be clarified, since the decision in the case of
Dhiren Chemicals (supra) was given by a Bench of five judges, it was
considered appropriate that a Bench of similar strength hands down an
authoritative pronouncement.

 

(ii) Background :

In the case of Dhiren Chemicals (supra), the decision
of the Supreme Court in the case of Usha Martin Industries 1997 (7) SCC 477 was
overruled based on an interpretation of a particular phrase whereby benefit of
exemption notification was denied, however, as per Board’s clarification,
exemption was granted. However, during the hearing of case of Dhiren Chemicals,
it was pointed out that based on the Board’s Circular, benefit of exemption
notification was granted to many cases. These were likely to be reopened if
interpretation in the case of Dhiren Chemicals was to be followed. Therefore,
para in the judgment of Dhiren Chemicals (para 11 in SCC) included a para as
follows :

 

“We need to
make it clear that regardless of the interpretation that we have placed on the
said phrase, if there are Circulars which have been issued by the Central
Board of Excise and Customs which place a different interpretation upon the
said phrase, that interpretation will be binding upon the Revenue.”

 


This was done to ensure to bind the Department wherever
exemption benefit was granted.

 

(iii) The counsel for the assessee laid stress on the binding
nature of Circulars qua the revenue authorities and argued that even if a
circular ran counter to the decision of Supreme Court, the Revenue was bound by
the circular and it could not take advantage of the Supreme Court’s decision. It
was also contended that once a Circular was brought to the notice of the Court,
the Revenue’s appeal based on the ground contrary to the Circular should be
turned down.

 

(iv) The Apex Court in the instant case observed that while
Circulars issued by the Board are undoubtedly binding on the authorities under
the respective statutes, the law declared by the Supreme Court would be binding
in terms of Article 141 of the Constitution and as such, Circular cannot prevail
once Supreme Court order to deny appeal to the Revenue and lay content with the
Circular would mean that there is no scope for adjudication by the High Court or
Supreme Court and this would be against the concept of majesty of law of the
Supreme Court. The appeal by the Revenue was allowed.

 

2. Penalty u/s.11AC of the Central Excise Act : Whether
mandatory ?

Supreme Court : Larger Bench :

Union of India v. Dharmendra Textile Processors, 2008
(231) 3 ELT (SC)

 

(i) Background :

The Division Bench of the Supreme Court referred the
controversy involved in several appeals to a Larger Bench to examine whether the
view expressed in Dilip N. Shroff v. Joint Commissioner of Income-tax,
Mumbai, 2007 (219) ELT 15 (SC) was correct. The issue involved related to
whether mens rea was an essential ingredient for penalty leviable
u/s.11AC of the Central Excise Act, 1994, and whether or not there was a scope
for levying penalty below the prescribed minimum. The Revenue contended that
there was no discretion with the authority in the matter of imposition of
penalty and they were duty bound to impose penalty equal to the duty determined
or payable. The assessee’s contention was that it was open for the authority not
to impose any penalty, as the basic scheme of the said S. 11AC was identical to
one u/s.271(1)© of the Income-tax Act and in the given case, it was open to
the Assessing Officer not to impose penalty. The Division Bench held the view
that correct position in law was laid down in Chairman, SEBI v. Shriram
Mutual Fund & Anr., 2006 (5) SCC (361). Hence, the matter was referred to a
Larger Bench.

 

(ii) The Division Bench also made reference to Rule 96ZQ and
Rule 96ZO of the Central Excise Rules, 1944. It was noted that in some cases,
the assessee challenged vires of Rule 96ZQ(5) and the Gujarat High Court held
that the said Rule incorporated the requirement of mens rea. The Division
Bench stated that even if Larger Bench took a view that penalty under this
clause was mandatory, it was open for an assessee to challenge vires of Rule
96ZQ(5). Further, it was also agreed that similar issue was involved in Rule
96ZO. However, the Additional Solicitor General submitted that in Rules 96ZQ and
96ZO, there was no reference to any mens rea as in S. 11AC where mens
rea was prescribed statutorily. This was evident from the fact that extended
period of limitation was permissible u/s.11A of the Act. In essence, it was
contended that penalty was for statutory offence and it was observed that
proviso to S. 11A provided the time for initiation of action, whereas S. 11AC
meant only a mechanism for computation and the quantity of penalty. Thus the
onus lay on the Revenue to establish that extended period is applicable and on
crossing this hurdle, the assessee is exposed to penalty and the quantum is
already fixed. It was also observed that in the statutes where mens rea
exists, if any penalty limit or a maximum penalty, etc. is prescribed, it is to
be levied in accordance with the said limits, but if no variable is provided, no
discretion exists.

iii) On the other hand, on behalf of appellants, reference of SC’s decision in case of State of MP & Ors. v. Bharat Heavy Electricals, 1997 (7)SCC 1 was made to contend that even if the Court held that imposition of penalty was mandatory, yet there was a scope for exercise of discretion. It was further submitted that various degrees of culpability cannot be on the same footing and S. llAC could be con-strued in a manner by reading into it the discretion and that was considered a proper way of giving effect to statutory intention.

iv) Relevant provision of each of S. llAC, Rule 96ZQ, Rule 96Z0 and also of S. 271(1)(c) of the IT Act were gone into. Further, observations made in Chairman SEBI’s case were also gone into at length and it was contended that a specific Section in the SEBIAct viz. S. 24 dealt with criminal offences under the Act and its punishment. Therefore, penalty leviable under Chapter VIA of the said Act was neither criminal nor quasi-criminal, but related to breach of civil obligation i.e., default or failure of statutory obligation and as such, mens rea by the appellant was not required. A catena of decisions were gone into where it was held that mens rea was not an essential foundation for imposing penalty for breach of civil obligations.

v) The Court further observed that the decision of Bharat Heavy Electricals’ case (supra) was not of assistance to the assessee, as the same proceeded on the basis of concessions and even otherwise, it was not open to the Bench to read into a statute which was specific and clear, something which was not specifically provided. The Bench further observed, “The statute is an edict of the Legislature. The language employed in a statute is the determinative factor of legislative intent”. The Court cited observations of many decisions on similar issues which inter alia included, “Rules of interpretation do not permit the Courts to do so unless the provision as it stands is meaningless or of doubtful meaning. The Courts are not entitled to read words into the Act of Parliament unless clear reason for it is found within the four corners of the Act itself. (Per Lord Loreburn, L’C, in Vickers Sons)”. The Court at the end stated “it is of significance to note that conceptual and contextual difference between S. 271(1)(c) of the IT Act was lost sight of in Dilip Shroff’s case (supra).

vi) The explanations appended in S. 271(1)(c) entirely indicate the element of strict liability on the assessee for concealment or for providing inaccurate particulars while, filing the return. The penalty under that provision is a civil liability. The Section read with the explanations indicates that the said Section has been enacted to provide for a remedy for loss of revenue and willful concealment is not an essential ingredient to attract a civil liability as in the case of prosecution u/ s.276C of the IT Act. Accordingly it was ruled that penalty u/s.llAC of the Act was mandatory.
 

3. CENVAT Credit whether admissible on outdoor caterer’s service in canteen of a manufacturer:

Larger Bench  decision:

CCE Mumbai 5 v. GTC Industries Ltd., 2008 (12) STR (Tri.LB)

i) The issue in the instant case relates to whether or not service of an outdoor caterer provided in the canteen of a manufacturer be considered ‘input service’ within the meaning of the definition of input service under Rule 2(1) of the CENVAT Credit Rules, 2004. The definition contains two parts – the first being the definition of input service and the second part is an inclusive clause listing various services. The Revenue contended that the inclusive clause is limited only to services enumerated in the said clause and since the disputed service i.e., out-door catering service is not one of them, it will not qualify as an input service.

ii) The appellant’s contention on the other hand was that the term ‘includes’ enhances the scope of the definition and therefore, a restrictive approach cannot be adopted. The appellant also contended that the words in the definition ‘activities relating to business’ were followed by the words ‘such as’ which was further followed by a list of services. Thus, the term ‘such as’ was used to provide only an illustrative list of services and not exhaustive. Any activity that related to business could form part of the expression ‘input service’.

(iii) The appellant also discussed an extract of press note dated August 12, 2004 along with the draft rules issued by the Ministry of Finance prior to introduction of CENVAT Credit Rules, 2004 which provided indication of the object of the Legislature. The notified rules expanded the scope of the draft rules by including the activities such as coaching and training, computer networking, credit rating, share registry and security, etc. In view of this, the appellant submitted that the argument of the Department that the scope of the definition was restricted to the services specified in the inclusive part of the definition was incorrect inasmuch as the scope of the term ‘activities relating to business’ was expanded and illustrated further when the rules were notified. Thus, the Legislature intended to allow credit on all such services which were activities relating to business. It was also argued that Service Tax being a value added tax and a consumption tax, it essentially formed part of the value of the goods
services, the credit of which  could  not be denied.

iv) In support of the above, para 4.1 of CAS-4 was referred to, which defined ‘cost of production’, and under the head ‘direct wages and salaries’ subsidised food is considered as part of direct wages and salaries being fringe benefits. It was also noted by the Tribunal that it was mandatory on part of the factories to provide canteen facility and failure of which attracts prosecution and penalty u/s.92 of the Factories Act, 1948. Service Tax on outdoor catering service is paid by the manufacturer for running the canteen, irrespective of the fact whether subsidised food is provided or not. Since this cost has bearing on the cost of production, it was held that catering services have to be considered as an input service relating to the business and CENVAT credit in respect thereof would be admissible. The view of the Tribunal expressed in the case of Victor Gaskets India Ltd. & Others, 2008 (10) STR 369 was accordingly approved.




Some Recent Judgments

I.          HIGH
COURT :

 

1.         Applicability
of Service Tax :

 

Whether laying pipes in
wall/roof/floor, etc. or fixing cable trays and digging earth to lay cables,
etc. liable under ‘Erection, Commissioning or Installation service’.

 

Commissioner of C. Ex., Chandigarh v.
Rajeev Electrical Works, 2010 (18) STR (P&H)

 

The appellant, engaged in electrical
fittings obtained registration under ‘Erection, Commissioning or Installation
service’ on 30-11-2004. Since the service was taxable from 1-7-2003, a
show-cause notice was issued for recovery of tax with interest and penalty for
the period 1-7-2003 to 30-11-2004.

 

The appellant contended that they were
engaged in laying pipes in wall/roof/floor for crossing of wires, fixing the
junction box, etc. and were not involved in any services in relation to
installation of plant, commissioning, machinery and equipment for the period
under dispute.

 

In Department’s appeal, the High Court held
that laying pipes in wall/roof/floor for crossing of wires, fixing the junction
box, etc. would not amount to installation of plant, commissioning, machinery
and equipment, and therefore was not liable to service tax. A reference was
made to Circular No. 62/11/2003, dated 21 -8-2003 where it was clarified that
putting up electric wires and fitting in residential premises would not be
covered in the definition of taxable service and thus not liable to service
tax.

 

2.         Applicability
of Service Tax on Rent-a-cab :

 

Whether tourist permit is essential for
levying tax on tour operator under Rent-a-cab service.

 

Commissioner of C. Ex., Chandigarh v.
Kuldeep Singh Gill, 2010 (18) STR 708 (P&H)

 

The respondent was providing transport
service to Indian Oil Corporation (IOC) for which service tax was demanded
under ‘Rent-a-cab’ category.

 

The Commissioner (Appeals) upheld the levy
of tax and penalty u/s.76.

 

However, the Tribunal held that since the
cabs were not leased to IOC for use of the vehicles at its own discretion,
service tax was not leviable.

 

In Department’s appeal to the High Court,
relying upon the decision in Secretary Federation of Bus Operators v. Union of
India, 2006 (2) STR (Mad.), it was observed that S. 65 of service tax
articulates a tourist vehicle and not holding a permit under the Motor Vehicle
Act as necessity for levy of tax. Just because it is essential to hold a permit
under the Motor Vehicle Act, the same cannot be made squarely applicable to
service tax.

 

Hence, it was held that the respondent
provided transport service and was liable for service tax under Rent-a-cab service.

 

3.         Order
:

 

Whether a letter from Commissioner
can be treated as order.

 

Chief Commissioner, LTU, Bangalore v.
TNT India Pvt. Ltd., 2010 (19) STR 5 (Kar.)

 

The respondent engaged in door-to-door
international courier service, approached the Additional Commissioner
questioning the applicability of service tax on the service provided by them.
The Additional Commissioner confirmed that the service was not taxable vide
order dated 23-12-2004.

 

Subsequently the Revenue realised that the
said order was against the Circular No. 341/43/96 TRU dated 31-10-1996 and
hence the order of Commis-sioner was void-ab-initio. A letter dated 9-1- 2006
was issued in this respect. The respondent filed an appeal before the Tribunal
contending that the letter dated 9-1-2006 was an order and the same was
appealable. The order was passed without providing opportunity of being heard
and hence was bad in law. The Tribunal passed the order in favour of the
respondent.

 

The Revenue then preferred an appeal before
the High Court where the main issues involved were :

 

(a)        Whether
Tribunal was correct in concluding that the letter of Commissioner was an order
appealable u/s.86, even though same was not passed u/s.73, u/s.83A, u/s.84 or
u/s.85 of the Finance Act, 1994 ?

 

(b)        Whether
‘International Flight’ activity was taxable service ?

 

The Revenue asserted that the letter of
Commissioner was only a clarificatory letter and powers conferred u/s.73,
u/s.83A, u/s.84 or u/s.85 of the Finance Act, 1994 were not exercised and
consequently S. 86 for appeals to the Appellate Tribunal could not be made
applicable. Hence, the order passed by the Tribunal was not maintainable.

 

The respondent contended that the letter
issued by the Commissioner was a valid order u/s.84 and was passed without
providing opportunity of being heard. Similarly the letter issued to the
respondent was different from the letter issued to the lower authorities. The
letter was incomplete and did not contain footnote, which contained directions
to the lower authorities to issue a show-cause notice for recovery of service
tax and interest thereon.

 

The High Court examined S. 84 pertaining to
revision of orders by the Commissioner and affirmed that any exercise of power
u/s.84 was an order within the meaning of the Finance Act, 1994. The Court
opined that order of the Additional Commissioner was reviewed by the
Commissioner. Therefore, the Commissioner should have provided opportunity of
being heard.

 

Hence, the High Court held that the
Tribunal was correct in concluding that the letter of the Commissioner was an
order, it was appealable and directed the competent authority to pass a valid
order on the issue of taxability after providing opportunity of being heard.

 

 

4.         Powers
of Director General of Service Tax (DGST) :

 

Whether DGST has power to entertain
appeal against order of lower authorities?

 

Aircargo Agents Association of India v.
Union of India, 2010 (18) STR 715 (Bom.)

 

The High Court in its order against writ
petition directed the parties to approach the DGST and the DGST to grant a
hearing before passing an order.

 

 

However, the parties contended that the
DGST had no power to entertain appeal against order of the lower authorities
and pass order.

 

The High Court held that the DGST did not
have power to pass orders.

 

II.        TRIBUNAL
:

 

5.         Applicability
of Service Tax :

 

Whether secondary services provided
towards export of services are exempt ?

 

Ruth Shipping Agencies Pvt. Ltd. v.
Commissioner of C. Ex., Thirunelveli, 2010 (19) STR 39 (Tri-Chennai)

 

The appellant, a CHA received brokerage
from steamer agent for arranging containers on which service tax was demanded
as ‘Business Auxiliary Service’. The appellant contended that the service was
non-taxable and the same was accepted by the Assistant Commissioner. However a review
order was passed by the Commissioner who held that the appellant was liable to
tax.

 

In an appeal preferred to the Tribunal, the
appellant relying on Circular No. 56/5/2003, dated 25-4-2003 contended that
secondary service of arrang-ing a container were primarily used by exporter of
services and they get consumed/merged with exported services, they were not
liable to tax.

 

 

The Tribunal holding that the view of the
appellant was corroborated by Lee & Muirhead Pvt. Ltd. v. Commissioner of
Service Tax, Bangalore, 2009 (14) STR 348, the demand was set aside.

 

6.         Burden
of proof of suppression :

 

Whether Department owns the burden to
prove suppression of facts by the assessee ?

 

R. A. C. Steels v. Commissioner of
Central Excise, Salem, 2010 (18) STR 775 (Tri-Chennai)

 

The Department levied penalty u/s.76,
u/s.77 and u/s.78 of the Finance Act, 1994 invoking extended period of
limitation.

 

The appellant pleaded to the Tribunal of
their ignorance. However, their prayer that the burden to prove that there was
suppression of facts by the appellant was not discharged by the Department was
accepted and penalties were set aside.

 

7.         CENVAT
Credit :

 

Whether CENVAT credit on washing
machines used in factory allowable ?

 

Commissioner of C. Ex. & ST, LTU,
Bangalore v. Micro Labs Ltd., 2010 (18) STR 771 (Tri-Bang.)

 

The respondent utilised CENVAT credit on
indus-trial washing machines falling under Chapter 84 of CETA and used for
washing uniforms of employees. The Department denied the credit on the machines
contending that the same are not used in manufacture of final products.

 

The matter was decided in favour of the
respondent by the Deputy Commissioner, LTU as well as the Commissioner
(Appeals).

 

The appellant relied upon India Cements
Ltd. v. CCE, Trichy 2006 (205) ELT 170 (Tri-Chennai) where it was held that any
capital goods which do not take part in the process of manufacture are not
eligible for CENVAT credit.

 

According to the assessee, industrial
washing machines fall within the definition of ‘capital goods’ as defined in
Rule 2(a) of the CENVAT Credit Rules, 2004. Further, the Commissioner (Appeals)
found that requirement of clean clothes is mandatory as per Rule 5.4 of the
Drugs & Cosmetics Act, 1945. The assessee also relied upon the case of
Toyota Kirloskar Motor Ltd. v. CCE, Bangalore-III, 2002 (148) ELT 402
(Tri-Bangalore).

 

The Tribunal held that the industrial
washing machines fall within Rule 2(a) and as they are used in factory of
manufacture, credit was admissible.

 

8.         CENVAT
credit on construction :

 

Whether CENVAT credit on construction
of staff quarters allowable?

 

The Laxmi Vilas Bank Ltd. v.
Commissioner of Central Excise, Trichy 2010 (19) STR 40 (Tri-Chennai)

 

CENVAT credit on construction of staff
quarters was disallowed on the ground that the staff residential quarters
located within the bank premises cannot be construed as office relating to bank
premises.

 

The Tribunal held that construction
services used in staff residential quarters located within the bank premises
are covered under the definition of input service as per Rule 2(l) of the
CENVAT Credit Rules, 2004. So, the CENVAT credit on construction service was
allowed.

 

9.         Penalty
:

 

Whether penalty u/s.76 and u/s.78 is
mutually exclusive ?

 

AR. AS. PV. PV. Motors Erode (P) Ltd. v.
Commissioner of Central Excise, Salem, 2010 (18) STR 722 (Tri-Chennai)

 

The appellant was ordered to pay penalty
u/s.76 and u/s.78 of the Finance Act, 1994 where service tax and interest were
already paid prior to com-munication of adjudication order.

 

The appellant contended that the penalty
u/s.76 and u/s.78 was mutually exclusive and since they had paid the penalty
u/s.78 @25%, the penalty imposed u/s.76 was liable to be set aside.

 

The appellant relied upon S. 78(1) of
service tax and the Tribunal’s decision in the case of M/s. Safe Test
Enterprises v. Commissioner of Central Excise, Salem and argued that since
service tax and interest had been paid prior to communication of the order,
penalty u/s.78 was liable to be reduced.

 

 

The High Court agreed with both the
contentions and set aside the penalty u/s.76 and reduced penalty u/s.78 to 25%
of service tax demanded.

 

10.       Refund
:

 

Whether refund can be denied on the
grounds beyond the scope of show-cause notice ?

 

Caliber Point Business Solutions Ltd. v.
Commis-sioner of Service Tax, Mumbai, 2010 (18) STR 737 (Tri-Mumbai)

 

The appellant, a BPO service provider filed
refund claim under Rule 5 of the CENVAT Credit Rules which was rejected on
technical grounds like ab-sence of registration number on input invoices,
non-availability of original invoices and absence of nexus between input and
output services. How-ever, no explanation was provided for absence of nexus.

 

The appellant filed an appeal wherein
rejection was made on the ground of absence of nexus, non-utilisation of CENVAT
credit and difference between ST-3 and refund claim. The later two grounds were
not a part of the original show-cause notice.

 

Relying on Reckitt & Colman of India
Ltd. v. CCE, 1996 (88) ELT 641 (SC), it was held that the Tribunal cannot
travel beyond show-cause notice and favour the Revenue and require the
appellant to meet demands which were never required to be met before the
Revenue.

 

Regarding the absence of nexus in case of
rent-a-cab service, air travel service and BPO service, the appellant relied
upon CST, Delhi v. Conver-gys India Pvt. Ltd., 2009 (16) STR 198 (Tri-Del.)
wherein it was held that without questioning the CENVAT credit, its eligibility
for rebate cannot be questioned.

Further the refund claim was allowed as the
appel-lant proved the nexus between rent-a-cab service, air travel service and
BPO service.

 

 

Refund — GTA service :

 

Whether service tax on transport
service paid by GTA as well as consignor can be refunded to GTA ?

 

Commissioner of C. Ex., Cochin v. Garuda
Transport, 2010 (18) STR 773 (Tri-Bangalore)

 

The respondent filed refund claim of
service tax on transport service paid twice. The tax was paid by him and the
consignor also. The refund claim was rejected by the lower authorities on the
ground of inadequacy of records. An appeal to the Commissioner (Appeals) was
filed by the Revenue.

 

The Commissioner (Appeals) in his findings
record-ed that the respondent had submitted audited final accounts, freight
bills, challans, CA certificate as to absence of unjust enrichment and
certificate from the sole consignor and accepted double payment of service tax
and held refund claim as valid.

 

The Revenue contended that the Commissioner
(Appeals) did not verify the documents to prove absence of unjust enrichment.
However, the Tribunal held that findings in order of the Commissioner (Appeals)
indicate that he had verified all the relevant documents and hence the refund
claim was accepted.

 

11. Review order : Scope :

 

Whether a review order can be passed
after appeal is filed against the original order ?

 

Avery India Ltd. v. Commissioner of
Service Tax, Delhi, 2010 (18) STR 760 (Tri-Delhi)

 

A refund claim of the appellant was accepted
by the Department but was credited to Consumer Welfare Fund. The Commissioner
(Appeals) how-ever passed the order that refund be credited to the appellant’s
account.

 

On receipt of order from the Commissioner
(Appeals), the Commissioner issued a show-cause notice to review the original
order passed by the lower authorities and later passed an order rejecting the
claim of refund.

 

The appellant contended that the original
order of the lower authority got merged with the order of the Commissioner (Appeals).
They also claimed that an appeal was filed by the Revenue against the order of
the Commissioner (Appeals) before the date of review order by the Commissioner
and hence the review order and order of rejection of refund based on review
order were not established.

 

 

The Tribunal observed that revision powers
of the Commissioner u/s.84 of the Finance Act, 1994 are restricted. As per S.
84(4), “no revision order could be passed by the Commissioner if any issue in
the order was pending before the Commissioner (Appeals).” In the instant case,
the order of the Commissioner (Appeals) was also appealed before the Tribunal.
Hence, the review order was set aside.

 

12.       Show-cause
notice :

 

Whether an order, which is at
variance with show-cause notice, is sustainable in law

 

Glass Fibres v. Commissioner of Central
Excise, Cochin, 2010 (18) STR 726 (Tri-Bangalore)

 

The appellant was engaged in the activity
of receipt and stacking operation, loading, packing, repacking, storage, etc.
and was registered as ‘Cargo Handling’ agency. The client of the appellant
refused to pay tax on the activity relating to storage, as it was not covered
as ‘Cargo Handling’ service. The appellant filed a refund claim of
non-reimbursed tax.

 

The original authority rejected the plea on
the ground that it was covered as ‘Cargo Handling’ services. However, the
Commissioner (Appeals) held that the activities related to storage, stacking
and shifting should be more appropriately classifiable under ‘Storage and
warehousing’ services.

 

Being aggrieved with the order of
Commissioner (Appeals), the appellant filed an appeal before the Tribunal and
contended as follows :

 

The Commissioner affirmed the order on the
grounds not mentioned in the show-cause notice. The appellant relied on various
case laws for taking such stand and contended that the order should be seen in
the light of show-cause notice and order-in-original and that the order at
variance of show-cause notice is not sustainable in law.

 

The Tribunal held that the judicial
authorities amply support the case of the appellant and in facts of the case,
the appeal was allowed and that the appellant was held not liable for service
tax even though the activity was as such taxable for the reason that the demand
was not conformed to the services alleged in the show-cause notice.

Part B — Some recent judgments

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1. Supreme Court :

Clearing and forwarding service : Consignment
agent :

Super Polyfabriks Ltd. V. CCE, Punjab, 2008 (10) STR
545 (SC)

The appellant under an agreement with Gas Authority of India
is a ‘consignment stockist’. The period in question was from 1-9-1999 to
31-7-2002. Both the Appellate Authority and the Tribunal dismissed respective
appeals. The short question was, whether in the facts and circumstances of the
case, the petitioner was providing services of clearing and forwarding. The
appellant pleaded that lower authorities proceeded only on the premise that the
agent was clearing and forwarding agent relying on the decision in the case of
Prabhat Zarda Factory P. Ltd. V. CCT, Patna 2002 (145) ELT 222 —
which was subsequently overruled by a Larger Bench in the case of Larsen &
Toubro Ltd. V. Commissioner, 2006 (3) STR 321. The Supreme Court relying on
the decision in the case of V. Lakshmanan v. B. R. Mangalagiri & Others,
(1995 Supp 2 SCC 33) opined that for determination of the liability, the
agreement has to be read as a whole. The purport and object in a contract could
be ascertained only from terms and conditions thereof. Neither nomenclature nor
a particular activity would be decisive. Whether in substance and effect the
person was a clearing and forwarding agent must be ascertained from the terms of
the agreement and conclude whether job of clearing and forwarding agent’s
operation was incidental to the main activity of getting the orders and selling
to clients or otherwise. Matter was remitted back to the assessing authority as
the orders were passed ex-parte because the appellant had not appeared
either before the assessing authority or the Appellate Authority.

2. High Court :

2.1 Construction service : Whether value of material
supplied free of charge includible in the value of taxable service ?

Era Infra Engineering Ltd. V. UOI, 2008 (11) STR 3
(Del.) :

The petitioner, engaged in providing commercial or industrial
construction service, received material free of cost from the owner company, was
issued show cause notice proposing to levy Service Tax on such free supply of
material, based on the explanation in Notification No. 1/2006-ST, which provides
for inclusion of value of goods supplied, provided or used by the provider of
construction service. Relying on the provisions of S. 67(3) and interim order in
the case of Larsen & Toubro v. UOI, 2007 (7) STR 123 (Mad.), the High
Court ruled that until conclusion of adjudication proceedings, material value
supplied free of charge would not be added for determining the taxable value and
that explanation in the Notification would not be applied to the detriment of
the petitioner. [CESTAT Delhi in the case of Millennium Constructions Pvt.
Ltd. V. CST, Delhi, 2008 TIOL 838 CESTAT Del. Waived pre-deposit of interest
and penalty levied when Service Tax demanded on addition of cement and steel
value received from recipient of services was already paid by the  appellant.]

2.2 Penalty : Whether reducible below the minimum prescribed limit ?

UOI v. Aakar Advertising, 2008 (11) STR 5 (Raj.)

The Tribunal in the appeals in question :


à
reduced the penalty imposed to 10% of the duty demanded

à
Entertained an appeal on merits when order was passed dismissing the appeal
for non-payment of pre-deposit.


Short questions that arose in the two appeals aggregated
were :


à
Whether the Tribunal could reduce the penalty imposable u/s.76 below the
minimum prescribed limit ?

à
Whether the Tribunal could entertain an appeal on merits when the Commissioner
(appeals) rejected the appeal because of default in making pre-deposit u/s.35F
of the Central Excise Act, 1944 ?


For the question no. 2, it was pleaded that since the
Tribunal already allowed the appeal, the assessee be granted reasonable time to
comply with requirement of pre-deposit even at such stage and set aside the
order of the Commissioner (Appeals) and direct the Commissioner to decide on
merits. The High Court acceded to such request and directed the Commissioner to
decide the appeal on merits on condition of complying with pre-deposit within 4
weeks’ time.

As regards the question no. 1, it was held that if cause of
failure was reasonable, penalty may be set aside. Penalty could be played with
only between minimum and maximum prescribed limits and could not be reduced
below the minimum prescribed limit under the garb of any discretion. Yet it was
not always necessary to impose maximum penalty. The matter was remitted back to
the Commissioner (Appeals) with a direction to decide the penalty afresh
objectively and dispassionately after hearing the parties and in view of the
above observations in the instant order.

3. Tribunal :

3.1 Cargo handling service :

M/s. Jet Airways (India) Ltd. V. CST, Ahmedabad, 2008
TIOL 979 CESTAT Ahm.

The appellant, an airlines that transports passengers and cargo by air, receives booking of cargo to be transported by themselves at the booking office or through lATA agents appointed at various locations all over the country. The Revenue demanded Service Tax considering the appellant as cargo handling agency, although the appellant neither collected cargo from the premises of consignor, nor delivered the same to the consignee. The appellant contende ‘ that the service of transportation of goods by air was ” made taxable w.e.f. 10-9-2004 without disturbing any of the existing entries. Further that, the Board’s Circular F. No. B/11/1/2002, dated 1-8-2002 while detailing cargo handling services cited illustrations of services provided by Airports Authority of India, Inland Container Depot, Container Freight Station, etc. did not refer to any airlines undertaking transportation of goods. Accepting these pleas and relying on the Tribunal decisions inter alia cases of Dr. Lal Nath Lab. (P) Ltd. v. CCE, 2006 (4) STR 527 (Tri. Del.) and Glaxo SmithKline v. CCE, 2005 (188) EL 171 (Tri.-Mum.), it was held that when new entry is introduced without disturbing existing entries, it has to be held that the new entry was not covered by any previous entry.

3.2 CENVAT Credit:

Hindustan Coca Cola Beverages Pvt. Ltd. v. CCE, Meerut, 2008 TIOL 1022 CESTAT Del.

Considering that manpower supply service was not liable for Service Tax prior to 16-6-2005, the credit of Service Tax paid by the contractor of the company was denied. Stay application was allowed on the ground that since the Revenue accepted Service Tax paid by the contractor, applicant had prima facie – strong case.

3.3 Construction Service:

M/s. Greenview Land & Buildcon Ltd. v. CCE Chandigarh, 2008 TIOL 900 CESTAT Del.

The appellant, a developer and a builder, constructed complex himself without engaging a contractor and sold flats. The order of the original authority was based on DGST Circular dated 16-2-2006, which provided that Service Tax was attracted on such construction. The Commissioner (Appeals) rejected the appeal for non-fulfilment of pre-deposit vide – stay order. The plea of the appellant was that CBCE Circular No. 96/7/2007-ST of 23-8-2007 suppressed the DGST Circular and clarified that when builder did not engage contractor for construction, no service provider-service recipient relationship existed to attract provision of Service Tax. This was accepted by the Tribunal and the matter was remanded for de novo consideration in the light of Circular No. 96/ 7/2007 and without insisting on pre-deposit.

3.4  Export of service:

i) Blue Star Ltd. v. CCE, Bangalore, 2008 (11) STR 23 (Tri.-Bang.)

The appellant booked orders of foreign principals and received commission in convertible foreign exchange and accordingly, contented that such business auxiliary services were provided from India and used outside India fulfilled conditions to construe the services as ‘exports’ in terms of Export of Services Rules, 2005. The Department’s contention was that services were provided in India and refund of Service Tax paid on ‘exported’ services was rejected. The Tribunal held that refund be granted as the conditions of Rule 3(2) were satisfied and the appellant’s services were held as exports. The Tribunal allowed the appeal stating that the Commissioner had not considered the clause in the agreement relating to services rendered by the appellant.

ii) M/s. National Eng. Industries Ltd. v. CCE, [aipur, 2008 TIOL 939 CESTAT Del.

The appellant, an agent of General Motors, USA provided services of sourcing them on contract with Indian Railways. The appellant, although ‘exported’ service, paid Service Tax on the commission received from General Motors through Indian Railways. Refund claim was rejected on the ground that the commission from General Motors was received through Indian Railways in Indian rupees in lieu of foreign exchange and therefore, condition of Rule 3(1)(b) of the Export Rules was violated. According to the appellant, the purchase order of the party provided that agency commission of certain amount of US dollars be paid in equivalent non-convertible Indian rupees at prevailing exchange rate on relevant date and based on this, Indian Railways paid to the foreign party net of the said commission amount.

The Tribunal held that the purpose of Rule 3(2) was to extend benefit of exemption of Service Tax to persons earning convertible foreign exchange and since the equivalent amount payable to the appellant was not released to Indian Railways, the appellant complied with the provision of Rule 3(1)(b). The appeal was allowed while stating that machinery of a statute should be interpreted so as to promote the object and purpose of the scheme and the case should be decided in fulfilment with the legislative intention.
 
3.5  Import of Services: Effective date: Whether 18-4-2006 or 16-8-2002 ?

CCE Raipur  v. Jindal Steel Power Limited,  2008 (11) STR 14 (7)

Contention of the Revenue that services provided by foreign-based commission agent were liable for Service Tax prior to 18-4-2006 under the category of business auxiliary service under Rule 2(1)(d)(iv) of the Service Tax Rules was rejected as the issue is considered settled in the case of Foster Wheeler’s [2007 (7) STR 443], wherein it was held that services provided by a service provider not having an office in India is taxable with effect from 18-4-2006 only with the insertion of S. 66A of the Finance Act, 1994.

3.6  Subcontractor’s services:

JAC Air Services Pvt. Ltd. v. CCE, New Delhi, 2008 TIOL 839 CESTAT DEL

The appellant provided cargo handling services in terms of agreement with Airports Authority of India for import of cargo. Relying on the Board’s instructions contained in F. No. 43/5/97-TRU of 2-7-1997 as to sub-consultancy, the plea of the appellant that they were subcontractors to Airports Authority of India was considered and waiver of pre-deposit was granted.

3.7 Refund: Under Rule 5 of the CENVAT Credit Rules, 2004:

Caliber Point Business Solutions Ltd. v. CCE, Belapur, 2008 (11) STR 15 (Tri.-Mum.)

The appellant exported taxable services and availed CENVAT credit on input services. Refund claim filed under Rule 5 of the CENVAT Credit Rules, 2004 was rejected on the premise of non-application of the said rule to service providers prior to 14-3-2006. Relying on the decision in the case of MNS Global Services (P) Ltd. v. CCE, 2008 (10) STR 273 (7), wherein it was held that any claim filed on or after 14-3-2006 even pertaining to the past period satisfying other requirements of the Rule and the Notification cannot be turned down on a ground which was not a condition of the Rule or Notification, it was held that the issue being identical, the ruling was binding on the Bench. The matter was remanded for a limited purpose of verifying other conditions of Notification 5/2006 CE(NT) as earlier rejection was  made only  on the  ground of non-applicability of Rule 5.

Part B — Some recent judgments

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1. High Court :

(i) Service Tax on provision of service and not service provider :

Rashtriya Ispat Nigam Ltd. V. Dewanchand Ramsaran,
2008 (11) STR 453 (Bom.)

In this case, the appellant filed appeal against judgment
passed by a single Judge in an arbitration petition. The respondent was
appointed as a handling contractor handling iron & steel for the appellant. In
November 1997, because of creation of reverse charge in case of clearing and
forwarding services, while paying the respondent their handling charge the
appellant deducted 5% Service Tax under the assumption that the respondent was a
clearing and forwarding agent. The deduction was made in spite of objection
raised by the respondent. There being a dispute, the matter was referred to a
sole arbitrator. The arbitrator dismissed the claim and therefore, Dewanchand
Ramsaran filed petition against the award. The Single Judge allowed the petition
and set aside the arbitration award after perusing the agreement between the
parties and finding that the agreement contained no clause or provision fixing
liability of Service Tax on respondent. The payment of tax made by the appellant
to the Government as recipient of service did not imply that it was paid on
behalf of the contractor. The contractor being service provider was not liable
to make payment of Service Tax. The Court considered the arbitration award as
faulty, considering it as opposed to the scheme of Service Tax, which levies tax
on services and not on service provider. The decision in the case of All
India Federation of Tax Practitioners v. UOI, 2007 (7) STR 625 (SC) was
relied upon. The appellant’s appeal was dismissed as dismissal of arbitration
award was upheld.


(ii) Refund :

ICCE Bangalore v. Motorola India P. Ltd., 2008 (11)
STR 555 (Kol).

The assessee in this case paid duty by error in excess of
duty payable and drew attention of authorities who in turn directed to file a
claim of refund. A refund application was subsequently filed by the assessee,
however the same was rejected on the ground of lapse of time and this was also
confirmed by the Appellate Commissioner. On moving the Tribunal, the refund was
allowed. The Court observed that the Tribunal chose to allow the case on the
basis that amount paid by mistake cannot be termed as ‘duty’ and therefore, time
bar did not apply. Since under similar circumstances, the Apex Court in India
Cements Ltd. V. CCE, 1989 (4) ELT 358 had accepted the case of the assessee,
the Court decided not to interfere with the Tribunal’s decision and rejected the
Revenue’s appeal.

2. Tribunal :

(i) Banking and financial services — Machinery given on
lease on monthly user charge basis :

CCE Vadodara I v. M/s. GE India Industries (P) Ltd.,
2008 TIOL 1444 CESTAT-Ahm.

The noticee gave extrusion machinery on lease under an
agreement to a party, which the Revenue held as banking and financial service
and served show-cause notices. The respondent cited the decision in the case of
Thermax Ltd. V. CCE Pune, 2007 (8) STR 487 (Tri. Mum), wherein it was
held that the appellant was not a professional in leasing business, and the
activity was confined to own products and considering ‘interest on loan’ not
forming part of value of taxable service in view of explanation 1 to S. 67 of
the Finance Act, 1994, the demand was held unsustainable. Relevant portion of
the definition of banking and other financial service was analysed and financial
lease covered by the said service as opposed to monthly refutal charge was
discussed. Following the decision in the case of Thermax (supra), the
Revenue’s appeal was rejected.

(ii) Business auxiliary service : Whether
individual/proprietor — a commercial concern ?

(a) Anuradha Jain v. CCE Bhopal, 2008 TIOL 1452 CESTAT-Del.

The appellant pleaded only on the issue that individual or
proprietary concern cannot be treated as commercial concern and Service Tax
applied to only commercial concerns in case of business auxiliary service. The
issue, having been decided in the case of CCE v. R. S. Financial Services,
2008 (9) STR 231, it was no longer ‘res integra’, the service was held as
liable for Service Tax.

(b) CCE Belgaum v. Chadha Auto Agencies, 2008 TIOL
1388 CESTAT-Mad.

The assessee, a dealer in sale and services of two wheelers,
also arranged loan from financial institutions/banks for hire/purchase and thus
promoted/marketed services of banks for which they received commission from such
banks/institutions. The Department proceeded to consider the activity as
business auxiliary service. The Commissioner (Appeals) however held that there
was no evidence to confirm as to whether remuneration was in the nature of rent
or business support service and that assessee provided office space, furniture,
etc. to banks to sell their products and therefore, held it as business support
service, which was challenged by the Revenue. The Bench found that they had
examined similar issue in the case of Silicon Honda v. CCE Bang., 2007
(7) STR 475 (Tri.-Bang). The Bench stated that the assessee did not cause sale
or purchase of services on behalf of another person for a consideration.
Financial institutions paying for occupying table space in the premises of auto
dealer could not be considered business auxiliary service and the Revenue’s
appeal was rejected.

(iii) CENVAT Credit:

(a)    Maersk India Pvt. Ltd. v. CCE Raigad, 2008 TIOL 1477 CESTAT-MUM

The appellant, registered under the category of ‘storage & warehousing’ and ‘maintenance and repairs services’, got a part of its empty containers repaired through its subcontractors. The sub-contractors charged Service Tax on their ‘repair charges’ received from the appellant and in turn, the appellant, against his Service Tax liability on output service of ‘maintenance & repairs’, claimed credit of Service Tax paid on input services of subcontractors. CENVAT credit was denied on the ground that sub-contractors did not have Service Tax liability and that there did not exist an agreement between the appellant and the sub-contractor for providing the latter’s services. The Tribunal found that there existed an agreement between the parties, which even the lower Appellate Authority had taken note of and irrespective of the same, it was ruled that once Service Tax has been paid by the supplier, the same cannot be questioned at the receiver’s end and accordingly, credit cannot be denied. Credit for the period prior to 10-9-2004 (the date on which the CENVAT Credit Rules were prescribed) also was held allowable as the ground was the same and in terms of existence of the Service Tax Credit Rules, 2002, credit could not be denied.

(b)    Credit: Whether can be utilised for Service Tax payment on GTA service?

M/s. Sri Sarvana Spg. Mills P. Ltd. v. CCE Madurai, 2008 TIOL 1429 CESTAT-Mad.

The short issue involved in the appeal was whether input duty credit can be utilised for payment of Service Tax on GTA services for the period October 2005 to March 2006. Since by an earlier order the appellant was already given a decision in their favour (covered under MMS Steel Ltd. & Others v. CCE Trichy, 2007 TIOL 1317 CESTAT-Mad.) and identical decision was also given in the case of RRD Tex Pvt. Ltd. v. CCE Salem 2007 TIOL 891 CESTAT-Mad., the order of the lower authority was set aside after condoning the delay in filing the appeal.

(c)    Jindal Steel & Power Ltd. v. CCE Raipur, 2008 TIOL 1450 CESTAT-Del.

The appellant, after taking registration as recipient of consulting engineer’s service and on the sum paid to foreign party, paid Service Tax net of abatement for R & D cess paid by them. The foreign party however had transferred merely the technology. Holding that the appellant was not entitled to utilise CENVAT credit for payment of Service Tax on output services, Service Tax was demanded and penalties were imposed. Since output services were provided much later than the year in which Service Tax was paid as receiver of services i.e., deemed service provider, input services were not considered co-relatable with output services. It was held that the date on which the registration for providing output service was sought was not relevant and that Service Tax paid as deemed output service provider was eligible for taking credit of. Further, Service Tax on transfer of technology under ‘consulting engineering service’ was wrongly paid by the appellant at the instance of the department and therefore also credit could not be denied. The Tribunal also stated that there was no time limit prescribed for utilisation of credit and therefore Service Tax paid on deemed output service was available as credit. The decisions cited by the appellant also supported the case of the appellant (Bhushan Power & Steel Ltd. v. CCE, 2008 (10) STR 18 (Tri.-Kol) and CCE Nagpur v. Visaka Industries Ltd., 2007 (8) STR 231 (Tri. Mum). Accordingly, the credit taken and utilised was held regular.

(iv) Management Consultant’s Service: Services to group companies:

M/s.  RPG Enterprises  Ltd. v. CCE Mumbai-IV, 2008 (11) STR 488 (Tri.-Mum).

The appellant received licence fee from various group companies including CEAT Ltd. under agreement with them, They contended as follows:

  • The client-service provider relationship did not exist between the appellant and its group companies.
  • Recovery  of expenses  was not a service.
  • The recovery was only of costs and it operated on no-profit-no-loss basis.
  • Since only cost was shared by all licensees, principle of mutuality was advanced.
  • In-house organisation cannot contextually be considered impartial adviser meeting the criterion of specified category.

The Tribunal stated that being a company incorporated under the Companies Act, 1956 it was a separate legal entity independent of the entities among which its cost incurred was apportioned and it was essential to look at the very nature of the activities undertaken by M/ s. RPG so as to determine its taxability as management consultant as defined in S. 65(37) of the Finance Act, 1994. As per the Tribunal’s observation of company’s memorandum of association, the company’s objectives included developing and providing part of general economic and industrial intelligence, information in diverse areas of taxation, finance, legal, insurance risk management, data processing, information, systems, marketing, drafting, public relations, etc. to develop cadres of managers, provide infrastructure and administrative set-up for promotion, supervision, monitoring, etc. to the licensees. The Tribunal also found and reproduced extracts from income tax assessment order of CEAT Ltd. stating to the effect that RPG issued guidelines for MIS and possessed expertise in strategic planning, corporate finance, etc. In summation, RPG’s activities were held to be providing services with a view to improve the structure of organisations of licensees and therefore charges recovered by them were held to be leviable to Service Tax in the category of management consultancy.

On the plea of principle of mutuality, the Tribunal stated that the relationship between the two independent legal entities was not that of principal-agent and it did not fulfil the conditions enumerated in the decision of Chemsford Club, 200 (37) SCC 214 as the identity of fund contributors and the recipients of the fund was not the same. The amount paid to RPG by CEAT was shown as expense for the receipt of service in the latter’s balance sheet and therefore it was held that no one acted on behalf of the other in the instant case.

The plea of valuing gross amount charged as inclusive of Service Tax also was not accepted on the ground that explanation 2 to S. 67 of the Financial Act, 1994 was added from 10-9-2004 and was not applicable retrospectively for the period under dispute.

The plea for non-applicability of longer period of limitation based on solicitor’s opinion also was not found convincing on the ground that bona fide belief was not blind belief and the intention to suppress the facts existed and thus rejecting the appeal the demand of Service Tax and penalties was confirmed.

(v) Penalty: Bona fide belief held:

Tidewater Shipping Pvt. Ltd. v. Commissioner of Service Tax, 2008 (11) STR 475 (Tri.-Bang).

In four different appeals, the appellant paid entire Service Tax with interest on being pointed out the lapse and much prior to issuance of show-cause notice. The adjudicating authority did not levy penalty considering the discretion u/ s.80. However, the Commissioner reviewed the orders and imposed penalties u/s.76 and u/s.78. Finally, all the cases were held to be under bona fide belief, appeals were allowed with consequential relief.


(vi)  Penalty u/s.78  :

Industrial Security Agency v. CCE All., 2008 (11) STR 347 (Tri. Del).

In this case, circumstances under which penalty is leviable and provisions of S. 78 have been discussed at length. The Tribunal observed that non-submission of return; result and concomitant of non-registration for which penalty is already imposed. Penalty u/s.78 is not imposable simply because the assessee has not filed the Returns. Accordingly, the Tribunal set aside penalty u/ s.78 considering that the facts and circumstances of the case not led by suppression, fraud or even contravention of relevant statutory provisions with an intent to evade Service Tax. Further, according to the Tribunal, if reasonable cause for failure to pay Service Tax is proven, penalty u/s.76 may not be imposed at all. However, the facts of the case were found to be not justifying complete waiver of penalty. Yet, the penalty u/s.76 was reduced.
 

(vii)    Software (Imported) whether goods or service?

Perfect Technologies v. CCE & CS, Siliguri 2008 TIOL 1386 CESTAT-Kol.

The appellants imported software from a foreign company in a digitised form by downloading the same online. The plea was made by the appellant that downloaded software being ‘goods’ was not chargeable to Service Tax. According to the Revenue, it could be treated as online service as it was downloaded online. However, considering the fact that even if it was a service provided online, reverse charge did not apply prior to 18-4-2006 (in terms of S. 66A coming into force) and such view was supported by the decision of Lohia Starlinger v. CCEX Kanpur, 2008 (10) STR 483 (Tri.-Del.) and demand for the subsequent period was not quantified by the Revenue. Further, in the case, there also existed a doubt as to the jurisdiction of the adjudicating Commissioner and therefore it was held fit for waiving pre-deposit.

(viii) Valuation of reimbursements:

Rolex Logistics Pvt. Ltd. v. Commissioner Service Tax, Bangalore, 2008 (11) STR 394 (Tri.-Bang) :

The appellants, registered under ‘management consultancy services’ and ‘maintenance and repair services’, filed their returns and paid Service Tax. On search operation, it was found that no Service Tax was paid on reimbursements shown in the balance sheet and hence, differential Service Tax was demanded in the show-cause notice. The appellant pleaded that rent of godown, salary of employees, etc. were not management consultancy services. The Tribunal observed that order of the Commissioner (Appeals) was non-speaking on various case laws relied upon by the appellant. Further, the facts of appellants’ filing of return and checking and scrutinising of records, etc. by the Department could not be prima facie considered ‘suppression’ in the light of various Supreme Court decisions cited by the appellants, waiver of pre-deposit was granted.

Part B — Some recent judgments

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Service Tax

I. Supreme Court :

Sales tax : Decision of Supreme Court in case of K. Raheja Development
Corporation referred to Larger Bench :

Larsen & Toubro Ltd. v.
State of Karnataka, 2008
(16) STT 286 (SC)


The assessee is engaged in property development involving
construction and building of flats and subsequent sale thereof. Under a
development agreement, it developed a plot owned by an owner and accordingly
tripartite agreement was entered into between the assessee, owner of plot and
prospective buyer. Relying on the Supreme Court judgment in K. Raheja
Development Corporation v. State of Karnataka, (2005) 2 STT 178 (SC), the
Department alleged that construction of flats was on behalf of purchaser and it
was a works contract and as such, sales tax be levied on works contract. The
question therefore was whether the tripartite agreement was entered into by the
assessee on its own or on behalf of the owner or on behalf of prospective
purchaser of flat.

The appellant did not deem it fit to rely on para 20 of K.
Raheja’s (supra) decision prima facie on the following grounds :



  • The developer–assessee undertook the contract to develop property of the
    owner.



  • The SCN merely proceeded on considering tripartite agreement as works
    contract.



  • There was no allegation in the SCN as to existence of monetary consideration
    in the first contract of development agreement.



  •  Whether the ratio enunciated in para 20 of the K. Raheja’s judgment was
    correct (reproduced below):

“20. Thus the appellants are undertaking to build as
developers for the prospective purchaser. Such construction/development is to
be on payment of a price in various instalments set out in the agreement. As
the appellants are not the owners, they claim a ‘lien’ on the property. Of
course, under clause 7 they have right to terminate the agreement and to
dispose of the unit if a breach is committed by the purchaser. However, merely
having such a clause does not mean that the agreement ceases to be a works
contract within the meaning of the terms in the said Act. All that this means
is that if there is a termination and that particular unit is not resold but
retained by the appellants, there would be no works contract to that extent.
But so long as there is no termination, the construction is for and on behalf
of the purchaser. Therefore, it remains a works contract within the meaning of
the term as defined under the said Act. It must be clarified that if the
agreement is entered into after the flat or unit is already constructed, then
there would be no works contract. But so long as the agreement is entered into
before the construction is complete, it would be a works contract.”


According to the Apex Court, if ratio of K. Raheja (supra)
had to be accepted, there could be no difference between a works contract and a
contract for sale of a chattel as a chattel and further there was a question
whether the petitioner was the contractor for the prospective flat purchaser.
The stand of the Department that not the development agreement but the
tripartite agreement was a works contract was found fallacious by the Court and
the judgment was recommended to be reconsidered by the Larger Bench.

Withdrawal of exemption retrospectively held as not within
the power of State besides being arbitrary.


 MRF Ltd. v. A.C. Sales Tax, 2008 (12) STR 206 (SC)


Kerala State Sales Tax authorities in this case withdrew
retrospectively an exemption granted for a specified period and for a specified
amount under an MOU with the Government granted by the Board of Revenue. The
Court observed that the petitioner made a huge investment in
diversification/expansion of its industrial unit based on the exemption and the
State was benefited through central excise duty, industrial development of the
State and contribution to labour and employment. Therefore denial of right
accruing to the appellant was unfair, unreasonable, arbitrary and violative of
Article 14 of the constitution. Further, the Court held that the State did not
have power to withdraw the exemption retrospectively under the provisions of the
Kerala General Sales Tax Act and allowed the appeal.

II. High Court :

Time bar : Whether applies to duty paid mis-takenly ?

CCE, Bangalore v. Motorola India Pvt. Ltd., 2008 (11) STR 555 (Kar.)


An amount was mistakenly debited in excess of duty payable to
the PLA account by the assessee. On noticing the same, the Department was
informed about it. The authorities directed to file refund claim which was
rejected on the ground of lapse of time and it was also confirmed by the
Appellate Commissioner. The Tribunal accepted the assessee’s case on the ground
that the amount paid mistakenly did not amount to duty. The High Court relying
on the Apex Court’s decision in the case of India Cements Ltd. v. CCE,
1989 (41) ELT 358 and also noting that the Madras High Court also held the claim
reasonable in view of the Apex Court’s above decision, rejected Revenue’s
appeal.

Karamchand Thaper & Bros. (Coal Sales) Ltd. v. UOI, 2008 (11) STR 459
(Cal.)

The petitioner engaged in the business of leasing operation and supervision work for supply of coal to power plants applied for registration under business auxiliary service. The Department did not re-ject the application. There is a provision for deemed registration if not granted within 7 days. After 22 months, the Department on its own registered the firm under clearing ‘and forwarding service. Al-though the rate is the same, liability under the said category would arise from 1999. The case of the petitioner was restricted to the point that without appropriate order of adjudication, the petitioner could not be registered under a different category. Being a factual issue, service tax authorities offered to re-examine the issue. The Court ruled that certificate granted could not remain in operation until the Commissioner, Service Tax, gives reasoned decision after hearing the petitioner and until then, the petitioner would continue to pay service tax under business auxiliary service. However, the Court stated that it had not made any observation on merits which the Commissioner, Service Tax, had to adjudicate.

III. Tribunal:

Business Auxiliary Service – Data processing services whether taxable under this category?

Dataware Computer  v. CCEC & ST (A) Guntur, 2008 (12) STR 121 (Tri.-Bang). Final order dated 25-3-2008.

The appellants under the order provided services of data processing and preparing MIS reports to Andhra Pradesh Electricity Board from July 2003 to April 2004. The contract defined the scope of services which included generation of various MIS reports and development of software for the same. The decision in the case ofBellary Computers v. CCE Mangalore, 2007 (8) STR 470 (Tri.-Bang.) was relied upon. Considering the service of the appellants as ‘Information technology service’, it was held as excluded from the scope of ‘business auxiliary service’.

CENVAT Credit:

Availing CHA services, whether input services for exporter of goods?

(i) CCE Rajkot v. Rolex Rings (P) Ltd., (2008) 16 STT (Ahd.-CESTAT)

While exporting goods, the appellant utilised services of CHA and surveyors. The Revenue treated them as non-eligible being of post-manufacturing activity and post-clearance of goods. Considering the Board’s Circular No. 91/8/2007 and the definition of ‘input services’ (which the Revenue had not considered), if was held that exporter remained owner of the goods until export took place and place of removal is port area. Further, the services are clearly related to business activity and therefore the Revenue’s appeal was rejected.

(ii)    [indal Steel & Power Ltd. v. CCE Raipur, 2008 16 STT (N.D. – CESTAT)

For consulting engineer’s services received from abroad, the assessee got registered  this category and paid service tax from CENVAT account. Later they also registered as output  service provider  of consulting  engineer’s services. However, the  services availed from foreign company  related to transfer of technology. The assessee however, took credit for the service tax paid as receiver. The Revenue denied credit on the ground that considering the relevant period i.e., when credit was taken, the assessee did not provide any output service and therefore, services received were not ‘input services’ for output services provided later. The assessee contended that service tax on transfer of technology was paid only under the direction of the Department. The Tribunal observed that had the service tax been paid by actual service provider, the assessee would have been entitled to credit. Merely because tax was paid as receiver of service, its right as recipient could not be denied. Further, at the relevant time, in terms of Rule 2(p) of the CENVAT Credit Rules, service tax was paid as deemed output service provider. Also, there is no time limit prescribed for utilisation of credit. Therefore, the date on which output service registration was taken is not at all relevant. Utilisation of credit was permissible in view of the extended definition of ‘output services’. Further, case laws cited by the appellant viz. Bhushan Power & Steel Ltd. v. CCE & ST, (2008) 12 SIT 155 (Kol. – CESTAT) and CCE v. Florescence Microfinish Pumps (P) Ltd., (2008) 12 SIT 423 (Delhi – CESTAT) also supported the view and as such the appeal was allowed.

Subcontractor’s services:

Evergreen Suppliers v. CCE Mangalore, (2008) 16 SIT 122 (Bang. CESTAT) – Final order dated June 23, 2008.

Service tax was demanded from the assessee under cargo handling service and clearing and forwarding service, whereas the assessee contended that it acted as subcontractor and the main contractor had discharged the service tax liability. However, in absence of purportedly sustainable proof, the demand was confirmed. The assessee submitted that in their own case for the earlier period, the Tribunal held that the field officers failed in their duty by not verifying whether principal contractor discharged the tax liability as stated by the assessee and the said failure could not be used against the assessee as in terms of Trade Notice No. 39-CE of 11-06-97, subcontractor was not liable. The Tribunal felt bound by this ruling and held the demand as unsustainable.

CENVAT Credit

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3. CENVAT Credit :



(a) Repair and maintenance services used for residential
colony by appellant-manufacturer — Residential colony necessary as factory
situated in remote area — Presence of workmen on the spot required to maintain
continuity in manufacture — Impugned services relatable to business — Repairs
and maintenance and civil construction for residential colony held as being
input services and, credit thereon held as admissible — Rules 2(l), 3 and 14
of Cenvat Credit Rules, 2004.

[Manikgarh Cement v. CCE, (2008) 9 STR 554 (Tri —
Mumbai)]

(b) Service Tax paid was allowed as CENVAT credit in
impugned order in respect of commission paid to agent. However, Revenue filed
an application for stay of the said order. It was held that Input service
means any service used by manufacturer directly or indirectly in manufacture
of final products and their clearance from place of removal — Input service
includes services used in relation to advertisement and sales promotion — Stay
of impugned order not granted — S. 86 of the Act, Rules 2(l) and 3 of Cenvat
Credit Rules, 2004.

[CCE v. Abhishek Industries Ltd., (2008) 9 STR 562
(Tri — Del.)]

 

Some recent judgments

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Service Tax

1. CENVAT credit:

Whether CENVAT credit is available for air travel for
business?

i) CCE, Ahmedabad vs. Fine Care Biosystems 2009 (16) STR 701
(Tri.-Ahmd.)

Commissioner (Appeals) allowed CENVAT credit of service tax
on outward freight and commission on air tickets. It was held that availability
of CENVAT credit on outward freight is till the place of removal that is the
port from which the goods are loaded for export made on FOB was pronounced in
ABB Ltd vs. Commissioner 2009 (15) S.T.R. 23 (Tribunal-LB) and for CENVAT on air
tickets, it was held that the definition of input service was wide enough to
cover all services used directly or indirectly in the manufacture process, the
CENVAT was admissible. Further, the revenue did not submit any proof that the
travel was for other than business purpose.

Whether credit on mobile
phones is available as they are not installed in the factory premises?



ii) CCE & CUS, Nagpur vs. Ultratech Cement Ltd. 2009 (16) STR 611 (Tri.-Mum)


The company availed CENVAT on the mobile phones provided to
the employees. The adjudicating authority allowed the CENVAT and dropped the
demand. The appeal filed by the Department was also dismissed on merits. Then
the appeal was made to the Tribunal with the contention that mobile phone
service is not cenvatable, as the telephone is not installed in the factory
premises. The Department also referred to the pending appeal filed with the
Bombay High Court (Nagpur Bench) against the Tribunal Order No. S/263-264/C-IV/SMB/07
dated 01-06-2007 (in the case of Manikgrah Cement).

However, the company citied various decisions holding that
CENVAT on mobile services was available. The list interalia included:

(a) CCE, Chennai vs. Showa Engineering Ltd & Another 2009
(14) S.T.R. 840 (Tri)

(b) ITC Ld vs. Commissioner of Customs & Cen tral Excise,
Salem 2009 (14) S.T.R. 847 (Tri) = 2009-TIOL-439-CESTAT-MAD

(c) Finolex Cables vs. Commissioner of Central Excise, Mumbai
;I, 2009 (14) S.T.R. 303 (Tri-Mumbai)

(d) Commissioner of Central Excise vs. Excel Corp Care Ltd.
2008 (12) STR 436 (Guj)

(e) Commissioner of Central Excise (LTU), Chennai vs. Brakes
India Ltd., 2009 (13) S.T.R. 684 (Tri-Chennai)



Citing the Gujarat High Court in case of Commissioner vs.
Excel Corp Care (supra), it was held that CENVAT on mobile phones was allowable
and it was observed that the onus to prove that they were directly or indirectly
used in connection with business activity is on the manufacturer.

Is CENVAT credit available
on colony security service, transport for employees and guest house maintenance?



iii) CCE vs Hindustan Zinc Ltd. 2009 (16) STR 704 (Tri.-Bang)


The company was not allowed input credit for colony security
service, transport service for employees and guest house maintenance service.

It was held that for a company, it was the duty to provide
accommodation to the employees and the colony being the property of the company,
it was obligatory for them to provide security also. Hence it was input service,
the definition under 2(1) of CCR being wide to cover such services. In case of
transportation of employees, it was observed that the services were in relation
to the manufacturing of excisable goods and hence it was also an eligible input
service. Similarly, in the case of maintenance of guest house, it was utilized
for the stay of businessmen during their business visit and hence was in
relation to the business activities was considered eligible input service.

Reliance was placed inter alia on:

(i)
Manikgrah Cement vs. Commissioner of C. Ex. & Customs, Nagpur (2008) 9 S.T.R.
554 (Tri-Mum) and


(ii) Commissioner of C. Ex., Nashik vs. Cable Corporation of
India Ltd. (2008) 12 S.T.R. 598 (Tri-Mum)


Whether CENVAT credit on specified services mentioned in Rule
6(3) on capital goods are limited to 20%?


iv) Idea Cellular Ltd. vs. CCE, Ahmedabad 2009 (16) STR 712 (Tri.-Del)


The appellant is engaged in providing cellular mobile service
to their Clients and while rendering this service, they rendered services of
interconnectivity and permitted use of infrastructure to other telephone
services. The revenue contended these were not actually rendering such services
but it was cost sharing and the same was not defined under section 65(115) and
hence they were exempted services. The Tribunal observed that the services were
subsumed in the services rendered by the appellant to the client and hence they
were not exempt services.

Further according to revenue, the 17 specific services and
the CENVAT on capital goods is also restricted to 20%. It was held that the
Board Circular No. 137/203/2007-CX-4 dated 01-10-07 clearly stated that the rule
does not restrict either the specified services or the credit on the capital
goods and the Departmental Circular is binding, unless a contrary decision is
pronounced either by the High Court or the Honorable Supreme Court.

Part B — Some recent judgments

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Service Tax

I. Supreme Court :


1.1 Burden of proof : ‘reverse burden’ only when one party
to a transaction is a dealer (S. 12 of KGST Act, 1963)



Haleema Zubair v. State of Kerala, 2009 (13) STR 113 (SC)

The appellant a proprietor had two concerns — one having
trading activity and another providing professional services of inspection and
certification of quality. Appeal was filed on being aggrieved with the additions
made by the sales tax assessing authority demanding sales tax on the service.
Income-tax returns, assessment orders and other certificates were produced
before the Appellate authority. The Appellate authority reduced the additional
income from 5% to 2.5%. Appeal was filed with the Sales Tax Appellate Tribunal,
where it was contended that as per S. 5(1)(iii) of KGST Act (the Act),
consideration received for transferring right to use any good for any purpose
was liable for tax. The Revenue claimed that the relevant documents were not
produced before the lower authorities and the burden of proof as to taxability
lay on the assessee as per S. 12 of the Act.

The orders passed by the Tribunal and the High Court did not
consider distinction between assessment orders under the Income-tax Act and
Sales Tax Act inasmuch as the fact that income tax would be levied on the entire
income, whereas sales tax could be levied only on the ‘sale’ and not the other
income which did not result out of ‘sale of goods’.

The condition precedent to the passing of an order was
assessment of sale. Professional service rendered did not constitute sale, which
attracted service tax. Further, the Supreme Court ruled that in general law, the
burden of proof lay with the State and ‘reverse burden’ must be construed having
regard to the nature of the statute. In the Kerala General Sales Tax Law,
however, S. 12 places the burden on the assessee, provided a transaction of
‘sales’ has taken place and at least one party to it is a dealer. Definition of
‘Dealer’ was analysed and it was concluded that the concern providing services
was not a ‘Dealer’ and professional fees were liable for sales tax. Appeal was
allowed by way of a remand to the adjudicating authority for consideration of
materials placed by the appellant.

Cases relied upon :



(i) BSNL and Another v. Union of India and Others,
2006 (2) STR 161 (SC)

(ii) Girdhari Lal Nannelal v. The Sales Tax
Commissioner, M.P. 1996 (3) SCC 701



1.2 Violation of
principle of natural justice :



Kothari Filaments v. Commissioner of CVS (Port), Kolkata
2009 (13) STR 225 (SC)

The appellant, an importer of lithosphere, placed order with
a foreign company for import of lithosphere. On physical verification out of
total quantity of 860 bags, only 189 had lithosphere and the rest contained
yellow coloured substance ‘Tetracycline’.

Appellants contended it to be the mistake of exporter and
attached the acceptance of exporters for the same to prevent penal action. The
Commissioner in his order gave directions for confiscation of goods and imposed
penalty before completion of inquiry. Appeal was filed on the grounds of
violation of principles of natural justice.

The respondent contended that acceptance of mistake by
exporter did not facilitate compliance of principles of natural justice and the
indication of outcome of overseas inquiry had been placed in the show-cause
notice. It was the duty of the appellant to prove the mistake of the exporter
and refute the conclusions of inquiry, the authority had no liability to
disclose their materials.

It was held by the Supreme Court that person charged with
misdeclaration had right to know the basis on which he was penalised, to reply
effectively as considered inter alia in the case of Rajesh Kumar
& Ors. v. Dy. CIT & Ors., 2007 (2) SCC 181 and thus the principle of natural
justice was held to be violated. Setting aside the order, the matter was
remanded to the Commissioner for consideration afresh.

II. High Court :

Co-operative Society in public service

Green Environment Services Co-Op. Society Ltd. v. Union of
India, 2009 (13) STR 250 (Guj.)

The assessee, a co-operative society, provided treatment of
effluents and managed waste generated by industrial units which were members of
society. They contended that the object of the society was in the nature of
public service i.e., for Prevention & Control of Pollution Provisions of
S. 65(25a) of the Finance Act, 1994 excluded services in the nature of public
services. S. 93 of the Finance Act, 1994 grants power to the Central Government
to grant exemption from payment of service tax by notifying in the Official
Gazette. The facts of the case led to the conclusion that the petitioner-society
had been established with the aid of Central & State Governments for treatment
of industrial effluents and waste materials in public interest. The
representation to the Central Government for exemption would be made within 2
weeks and would be placed by the Central Government within two months from that
day. Interim stay for recovery was granted.

III. Tribunal :


3.1 Air travel agent : Adjustment of tax on cancellation of tickets :



CCE, Jalandhar v. Sharma Travel, 2009 (13) STR 150
(Tri.-Del.)

The respondent, an air travel agent adjusted service tax
amount on cancelled air tickets and paid the differential amount. The adjustment
was disallowed and was upheld by the Commissioner (Appeals). The Tribunal
remanded the matter to the Commissioner (Appeals) to decide on merits, evidences
and in consideration of question of limitation.

The Commissioner set aside the demand, but the
Revenue pleaded to invoke doctrine of unjust enrichment. Rejecting the Revenue’s
appeal, the Tribunal confirmed the order of the Commissioner (Appeals).

3.2 Registered society and a charitable trust whether
liable under categories club or association service, convention service and
commercial training and coaching ?



M/s. Ahmedabad Management Association v. Commissioner of
Service Tax, Ahmedabad, 2009 TIOL 214 CESTAT-AHM

AMA was a registered society and a charitable trust under Society’s Registration Act and Bombay Public Trusts Act. AMA filed an appeal against the order of the Commissioner for confirmation of demand of service tax on services provided by it. Penalties u/s.7SA, u/s.76, u/s.77 and u/s.78 had been imposed.

The appellant contended that AMA was a non-profit making institution as amounts earned by it were utilised for fulfilment of its objectives and members were liable for liabilities, but had no share in surplus as it was ploughed back. Thus, it was not a commercial concern. The programmes conducted were exempted from year 2003 as vocational training by the government. Therefore, these services cannot be classified as ‘Commercial Training and Coaching Services’. The services of a club or association came under the tax net w.e.f. 16-6-2005. Exclusion clause excluded services provided by associations in nature of public service. AMA did not have any profit motive and provided public services, which were excluded from taxable services. Convention service was liable to tax when provided by a commercial concern. Convention events were not only for members but also for general public. A Circular dated 1-11-2006 clarified that non-commercial concerns would not fall under it.

The respondent considered the definition of commercial training and coaching centre as per the Act and did not consider training programmes conducted at AMA as vocational training programmes, which were exempted.

As regards club or association services, since they were provided to members, they were taxable and were not covered by exclusion clause, according to the Revenue.

As regards convention services, since they were provided to general public not free of cost but for consideration, they could not be excluded from the tax net, as per the Revenue.

It was held by the Tribunal  that:

a) AMA was not a commercial concern in consideration of its objectives, ploughing back of sur-pluses or no profits in the hands of members. The cases on which decision was relied upon were Great Lakes Institute of Management 2008 (10) STR 202 (Tri.-Chennai) and Institute of Chartered Financial Analysis of India 2008

(TIOL 2036 CESTAT-Bang). AMA was not liable to pay service tax on membership fees received from members of the club, as it was not providing any specific services.

b) The programmes conducted were continuing education programmes and not commercial programmes.

c) Since AMA was not a commercial concern, no service tax could be levied on convention services, and therefore the appeal was allowed.

3.3 CENVAT Credit: Transfer on takeover:

CCE, [aipur v. Hindustan  Coca Cola Beverages Pvt. Ltd., 2009 (13) STR 222 (Tri.-Del.)

The issue in this case was of transfer of credit from one bottling plant to another plant. The Revenue contended that neither the ownership nor the capital goods were transferred.

The Commissioner (Appeals) in his order stated that one bottling plant was taken up by another as registration certificate of the taken over plant was surrendered and the unutilised credit was transferred to the plant which took over. There was no revenue loss and no contravention of any rule. The credit was allowed.

Whether    construction of jetty,  ‘capital goods’ ?

Penalty:  interpretation of statute:

Mundra Port & Special Economic Zone Ltd. v. C.E., Rajkot, 2009 (13) STR. 178 (Tri.-Ahmd.)

The appellants were providers of port services, storage and warehousing services and cargo handling services liable for service tax.

The major issue was availment of credit on steel and cement used for construction of jetty and port building. Attention was drawn by the appellant to the definition of inputs and emphasised on expression ‘used for providing output services’ and reliance was placed on the case of State of Punjab & Another v. British India Corporation Ltd., (AIR 1963 SC 459). It was contended that the operations of port and management serviees was not possible without such construction and only incidental to the main activity should be excluded from the purview of expression ‘used for’, therefore the credit on such inputs should be allowed.

It was held that the jetty did not fall within the definition of capital goods and was constructed by the contractor. Cement and steel were used by the contractor for construction services and considering them ‘not used’ for providing port service, credit was disallowed.

The credit of service tax on mobile phones, CHA and surveyor charges, rent-a-cab and professional fees was allowed and credit on club house fees was disallowed as it was for recreation of employees, and was not for providing output services.

Credit of duty on air conditioners, being ‘capital goods’ as per the Rules, was allowed.

Penalty was set aside as the issue involved bonafide interpretation of law.

Ruchi  Health Foods Ltd. v. CCE, Chennai, 2009 (13) STR 330 (Tri.-Chennai)

The assessee was in the manufacture of refined oil and vanaspati, used CENVAT credit on capital goods viz. acid oil plant used for refining and processing. Credit availed was disputed as acid oil was manufactured in a separate plant where, according to the Revenue, no dutiable goods emerged. Further, credit of duty paid on computers, paints and welding electrodes was also disallowed.

Refinery was part of the factory and the assessee could take credit of duty paid on capital goods and not on exempted or nilrated goods. The impugned goods produced PFAD also, which was cleared on payment of duty. Acid oil was also cleared on payment of duty. Thus, machinery installed in refinery was not exclusively deployed in producing only non-dutiable products. Declarations as per the rules, records, invoices and returns relating to credit had been furnished to the Dept. indicating that PFAD was also an acid oil which was cleared on payment of duty. Likewise, credit on duty on computers, electrodes in view of decision of Jawahar Mills Ltd. v. CCE, Coimbatore, 1999 (108) ELT 47 (Tri.-LB) were allowed. The order itself was set aside and appeal was allowed.

3.4 Can penalty u1s.76 be reduced?

CCE – Rajkot v. Shri BSGK Shashtry, 2009 TIOL 173 CESTAT-AHM

The Commissioner (Appeals) reduced the penalty uj s.76 against which the Revenue filed an appeal and contending that S. 76 was unambiguous and did not provide liberty to reduce penalty and submitted that decision in M/ s. ETA Engineering Ltd. [2006 (3) STR 429 (Tri. LB)] had to be followed.

Various decisions in which authorities used discretion to impose less penalty u/ s.80 of the Finance Act, 1994 submitted by the appellant were considered and rejecting the Revenue’s appeal, extension of S. 80 by the lower authority was upheld.

3.5 Limitation:

Refund: Whether  barred by limitation?

CCE, Pune-III v. M/s. Beharay & Rathi Constructions, 2009 TIOL 178 CESTAT-Mum.

The respondents, being recipient of ‘goods transport agency’ services, thus liable for service tax, availed abatement of 25% instead of 75%, erroneously resulting in excess payment. The refund claim was held to be hit by time bar of S. 11B of Central Excise Act, 1944.

The Commissioner (Appeals) held that tax collected by mistake of law, did not attract S. 11B and cited various case laws in support.

The Tribunal held that among various decisions cited, many were of prior period in which amendment dated 19-9-1991 in S. 11B had not been considered. Therefore, the impugned refund claim filed by the respondents was hit by time bar in consideration of S. 11B.Reliance was placed on Mafatlal Industries Ltd. v. Union of India, 1997 (89) ELT 247 (SC) and Commissioner of Customs v. Aman Electrical Manufacturing Co., 1997 (90) ELT 260 (SC).

Kilburn Engg. Ltd. v. CCE, Vadodara-II, 2009 (13) STR 285 (Tri.-Ahmd.)

The appellants engaged in the manufacture of machinery, who installed, erected and commis-sioned it at customer’s premises and raised separate bill for this. The dispute related to supervision of erection, commissioning of machinery to attract service tax liability under consulting engineering services.

The Commissioner (Appeals) observed that supervision of erection and commissioning required professional knowledge and therefore fell within the scope and ambit of ‘consulting engineering service’ and relied on the case M. N. Dastur, 2002 (140) ELT 341 (Cal.).

The Tribunal relied upon case CCE, Cochin v. BPL Telecom Pvt. Ltd., 2007 (5) STR 349 (Tri. Bang.),
 
M/s. Jyoti Ltd. v. CCE, Vadodara, 2008 (9) STR 373 (Tri. Ahmd.) and held that technical assistance provided by manufacturer of goods could not be held as consulting engineering services.

It also considered that first and second show-cause notices for the same period for the same facts being barred by limitation, relief was allowed.

3.6 Jurisdiction:

CCE, Mumbai v. Central Cable Pvt. Ltd., 2009 (13) STR 328 (Tri.-Mumbai)

An appeal was filed against the order passed by CCE (Appeals), for consideration of legal aspects.

The Commissioner (Appeals) in his order observed that the Assistant Commissioner had no jurisdiction to issue show-cause notice.

The Revenue contended that Circulars on which reliance was placed by the Commissioner (Appeals) were not in force when the matter was adjudicated by original authority and he was empowered by a Circular to issue show-cause notices.

The Tribunal remanded the matter back to the Commissioner (Appeals) for reconsideration.

3.7 Reimbursements – whether taxable? (Also limitation) :

Rolex Logistics Pvt. Ltd. v. CST, Bangalore, 2009 (13) STR 147 (Tri.-Bang)

The appellant engaged in ‘Management Consultancy Service’ took over operations of two proprietary firms, which were not providing management consultancy services. They were accused of suppression of value of taxable services as regards reimbursements claimed by the firms and evasion of service tax for which demand along with interest and penalty was raised.

The appellant contended that show-cause notice was issued based on the information from balance sheet and other books of accounts and therefore suppression could not be alleged.

The Tribunal observed that service tax liability accounted only towards the amount received and not towards reimbursements.

It was further held that there was no suppression of facts with an intention to evade tax, therefore longer period could not be invoked.

Some of the cases relied upon:
(i) Scott Wilson Kirkpatrick (l) Pvt. Ltd. v. CST, 2007(5) STR 118 (T)
(ii) B.S. Refrigeration Ltd. v. eST, 2006 (4) STR 103(T)
(iii) Glaxo Smithkline Pharmaceuticals Ltd. v. CCE, 2006 (3) STR 711 (Tribunal)

Some Recent Judgments

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Service Tax

Part B : Some Recent Judgments




I.
SUPREME COURT :




1.
Ranking of creditor and tax arrears :


Whether realisation of Central Excise duty has priority over
secured creditors :


Union of India v. SICOM Ltd., 2010 (18) STR 673
(SC) :

The respondents are State Financial Corporation and secured
creditor and the appellant, the Excise Department intended to recover arrears of
excise from the respondents. The matter involved in the case was whether
realisation of Central Excise duty has priority over secured creditors.

The appellants placed reliance on Mascon Marbles Pvt. Ltd. v.
Union of India, 2003 (158) ELT 424 (SC) wherein it was held that arrears of tax
have priority over all the other debts.

The respondents contended that Article 372 of the
Constitution of India on strict interpretation gives priority to arrears of tax
revenue above the unsecured debts only and the secured debts would prevail over
the tax arrears.

The respondents relied on cases like M/s. Builders Supply
Corporation v. Union of India & Others, [AIR 1965 SC 1061] and Bank of Bihar v.
State of Bihar & Others, [AIR 1971 SC 1210], where the Apex Court held that
arrears of tax revenue have priority over other debts but not over secured
debts.

Further reliance was placed on Sitani Textiles & Fabrics (P)
Ltd. v. Asstt. Commissioner of Customs & Central Excise, Hyderabad-I, [1999
(106) ELT 296 (AP)], where the AP High Court held that right of lien of a
secured creditor being statutory has a higher claim over tax dues even though
the property involved may have been attached or seized under other law.

The Apex Court opined that even recovery of Central Excise
duty is treated at par with recovery of arrears of land revenue. It held that on
perusal of S. 11 of the Central Excise Act, 1944 it appears that dues of Central
Excise can be treated as land revenue only when the dues are not fully recovered
from sale of excisable goods. The land revenues have priority over the dues of
unsecured creditors. However, the dues of secured creditors are in priority when
compared to arrears of land revenue. At length, decision in the case of Dena
Bank v. Bhikabhai Prabhudas Parekh & Co., 2000 (5) SCC 694 was discussed and
relied upon by the Court which observed — “It seems a Government debt in India
is not entitled to procedure and a prior security debt.”

Further relying on Periyar & Pareekanni Rubber Ltd. v. State
of Kerala, 2008 (4) SCALE 125, the Court held that non obstante clause under a
State Financial Act being statutory would not only prevail over any of the
signed contract but also over any other laws.

II. HIGH COURT :


2. Adjudication :


Can issue for determination of amount in SCN be considered in
writ proceedings ? :


Creative Infospace Pvt. Ltd. v. Additional Commissioner,
Chennai 2010 (18) STR 553 (Mad.) :

The writ petition was filed to quash a show-cause notice
issued by the Revenue as to why service tax and interest could not be demanded.
It was argued on grounds of principles of natural justice and that the authority
had already pre-decided the issue and that the tax was quantified.

The appellant relied on the case of Siemens Ltd. v. State of
Maharashtra and Others wherein it was held that writ petition is maintainable
against a show-cause notice if the respondent has already determined the
liability of the assessee.

The High Court held that quantification of tax in the
show-cause notice is a statutory requirement and cannot be stated that the
authority has pre-decided the issue. Therefore the decision cited by the
petitioner is not applicable to the present case. It was further held that the
question invoking extended period of limitation should be left to the
adjudicating authority and it could not be decided by filing a writ petition.
The appeal was dismissed.



3.
Classification :


(i) Whether del credere agent can be classified as
Clearing and Forwarding Agent :



Commissioner of Service Tax, Bangalore v. Sreenidhi
Polymers (P) Ltd., 2010 (18) STR 385 (Kar.) :


The assessee contented that it was an agent of M/s. IPCL, as
a del credere agent and not C & F agent.

A substantial question of law was raised before the High
Court whether service rendered can be classified as C & F agent.

Del credere agent is a mere surety and is liable to principal
only when purchaser defaults. Service rendered is in nature of indemnifier as
the assessee has to indemnify to the value of goods sold by the principal to its
customers and that the assessee shall ensure proper repayment of value of goods
sold.

Service rendered by del credere agent was included under
‘Business Auxiliary Service’ by way of amendment in the year 2005. By
introducing del credere agent as business auxiliary service provider, it is
implied that prior to amendment Del credere agent was not liable to pay service
tax. Therefore, service rendered by del credere agent cannot fall under
‘Clearing and Forwarding Agent service’.


Bangalore v. Raj Rajeshwari International Polymers (P) Ltd.,
2010 (18) STR 390 (Kar.) :

Following the decision in the above case of Sreenidhi
Polymers (supra), the Revenue’s appeal was dismissed in this case also holding
that Del credere agents were not C & F agents and not liable for service tax
before 16-6-2005.

(ii) If an amount is taxed under one category for an
assessee, can the same be taxed in the hands of another under another category ?


Speed and Safe Courier Service v. Commissioner, 2010 (18) STR
550 (Ker.) :

The assessee is engaged in rendering courier service which involves collection of letters, par-cels, etc. from customers and delivering to the addresses. In order to carry on this business, the assessee appointed several agents named as franchisees. The franchisees collect service charges from customers along with service tax for delivery of parcels, articles, letters, etc. The entire charges collected are passed on to the assessee and the assessee makes payment to franchisees at agreed rates. It implies that courier service operation leads to sharing substantial amount with the franchisee and assessee gets only the balance amount.

The Department assessed the net amount retained by the assessee towards value of taxable service un-der ‘Franchisee service’. In other words, the Depart-ment levied tax twice on the same amount — under courier service and under Franchisee service. The assessee had filed appeal against the Commissioner’s order, which was rejected by the Tribunal, so the assessee preferred an appeal to the High Court.

The High Court held that if a service falls under two heads, there is no provision in the Finance Act, 1994 to tax the same twice under two heads. Having regard to the definition of ‘franchise’ it is clear that under franchise agreement, franchiser gives a right to the franchisee to do business in a representative manner by using its trade mark or trade name. It was further held that agents were doing business on behalf of the assessee and as such, assessee was not rendering any service apart from accepting parcels for courier. The demand under another category being untenable the ap-peal was allowed.

    4. Penalty :

Whether penalty leviable, if amount involved is meager :
Commissioner of C.Ex., Jalandhar v. Ess Ess Kay Engg. Co. Ltd., 2010 (18) STR 393 (P & H) :

Penalty was imposed by the Commissioner for failure to deposit service tax within prescribed time limit. Appeal was filed in this regard by the assessee, which was partly allowed whereby period of payment of interest was modified and penalty order was set aside.

The amount of tax was not more than Rs.30,000. As the amount of penalty was meager, appeal of the Revenue was dismissed.

    5. Service tax applicability :

i) Whether service tax applicable as consulting en-gineer’s services for works contract prior to June 01, 2007 :

Commissioner of Service Tax, Bangalore v. Turbotech Precision Engineering Pvt. Ltd., 2010 (18) STR 545 (Kar.) :

The assessee was rendering services like design development, design review, installation and commissioning, technology transfer for study and design of oil-free compressor systems.

The Department contended that the above services were covered within ‘Consulting Engineer Services’ as per S. 65(13) of the Finance Act, 1994 and de-manded service tax, interest and penalty thereon and confirmed the same. The Commissioner of Central (Appeals) rejected the plea, but the CESTAT decided the case in favour of the assessee. There-fore, the revenue filed appeal in the High Court.

The High Court observed that prior to amendment in the definition of ‘Consulting Engineer’ by the Finance Act, 2006, the companies were not liable to pay service tax. Therefore, for the period prior to 1-5-2006, the assessee could not be considered as a consulting engineer.

The agreement entered into between the assessee and its employer falls under the definition of works contract. However, since the contract was for the period from 1997 to 2001, and works contract was introduced under service tax net with effect from 1-6-2007, it was held that the assessee cannot be compelled to pay service tax under the category of ‘Works Contract’.

[Note : Readers may note that the finding that the definition of consulting engineer did not cover ‘company’ prior to 1-5-2006 is in deviation from the law laid down by M. N. Dastur & Co. Ltd. v. UOI, 2002 (140) ELT 341 (Cal.) and Tata Consultancy Service v. UOI, 2001 (130) ELT 726 (Kar). The final conclusion that the contract is covered by works contract service and therefore no service tax can be demanded being on a different premise, does not give rise to much issue. However, the conclusion about the company’s exclusion cannot be relied upon, in our opinion.]

    6. Valuation :

i) Whether the value of materials consumed during provision of photography services be exempted under Notification No. 12/2003 :

Commissioner of C.Ex. v. Yahoo Colour Lab, 2010 (18) STR 548 (P&H) :

The assessee was engaged in services of photo-graphy developing and printing. The Revenue contended that the assessee has not sold the material/goods to the recipient of service and therefore, it cannot claim benefit of Notification No. 12/2003–ST, dated 20-6-2003.

The respondent explained that the photography films, printing papers, chemicals, etc. consumed during provision of photography services are the essential ingredients of their developing/printing job and without their use, the photography ser-vices cannot be provided. They further claimed that the material brought and sold was liable to Sales Tax which is a State levy and Central Gov-ernment does not have any power to levy tax on purchase or sale of goods under service tax, unless the same is in the course of inter-State trade.

The Adjudicating Authority relying on clarifica-tion dated 7-4-2004, dropped the proceedings. However, the Revisional Authority reviewed the order and confirmed the demand. However, the Appellate Tribunal restored the original order of the Adjudicating Authority and therefore, the Revenue filed the present appeal.

The High Court relying on the judgment delivered in BSNL v. UOI, 2006 (2) STR 161 (SC) held that in case of composite contract where both, service and sales components are discernible, service tax could not be levied on sale portion. Therefore, the impugned order of the Tribunal was maintained and the Revenue’s appeal was rejected.

    III. Tribunal :

    7. Adjudication :

    i) Unjust enrichment — Whether applicable when amount paid did not represent service tax :

Commissioner of Service Tax, Delhi v. Avery India Ltd., 2010 (18) STR 428 (Tri-Del.) :

The revenue demanded service tax under ‘Consult-ing Engineer Service’ for receiving services from overseas company and confirmed the same. Com-missioner (Appeals) set aside the order which was upheld by the Tribunal.

The assessee filed claim for refund of service tax and interest paid. The original authority passed an order for refund claim, but ordered to be depos-ited to Consumer Welfare Fund under principles of unjust enrichment. The Commissioner (Appeals) held that unjust enrichment did not apply and or-dered for cash refund. The Department preferred an appeal against the order of the Commissioner (Appeals).

The Department argued that the assessee availed credit and service tax factor was added to cost of goods manufactured and thus burden of tax was passed on to the customers.

The assessee contended that he being a recipient of service, paid service tax out of his own pocket and the credit taken was also reversed before is-sue of show-cause notice. It was argued that as a recipient of service, the question of passing the burden of service tax did not arise.

The Commissioner (Appeals) found that the prin-ciple of unjust enrichment and the burden of proving that service tax has not been passed does not arise as the service tax was not payable on technical know-how and the assessee paid service tax out of its own pocket. Further, after taking the credit on payment of tax, the assessee reversed the same, so it can be said that no unjust enrich-ment took place.

The Tribunal held that service tax was not appli-cable, therefore whatever amount was collected did not represent service tax. Therefore, provi-sions relating to refund of service tax, and unjust enrichment could not be made applicable and the refund was held admissible.

    ii) Delay in filing appeal : Whether condonable ?

Indo Colochem Ltd. v. Commissioner of Service Tax, Ahmedabad, 2010 (18) STR 615 (Tri-Ahmd.) :

The application for condonation for delay of 84 days was filed with the Commissioner (Appeals) was rejected. The application was delayed as the manager of the company was on leave and later he left the organisation, and therefore the appeal was filed by the Director of the company. The as-sessee filed stay application against this order.

The counsel of the assessee submitted that the Commissioner (Appeals) did not pass the order on merit but rejected the appeal as the delay was not condoned.

The Tribunal held that there being genuine reason for the delay, the Commissioner (Appeals) was directed to consider the appeal and stay applica-tion and pass the order on merit.

   iii) Extended period of limitation — Whether invokable in absence of suppression ?

Commissioner of C.Ex., Surat -II v. Haryana Sheet Glass Ltd., 2010 (18) STR 640 (Tri-Ahmd.) :

The assessee paid service tax on outdoor catering service. The Commissioner (Appeals) held that the assessee was eligible for credit by relying on the judgment of M/s. GTC Industries 2008 (12) STR 468 (Tri-Lb.) and that extended period of limitation was not invokable when there was no suppression of fact with intent to evade payment of duty.

According to the Department, in the case of GTC Industries (supra) it was held that credit of service tax would be admissible if cost of such service is included in assessable value of final product, whereas in the present case there was no evidence to show that value of catering service was included in assessable value of final product.

The assessee submitted chartered accountant’s certificate to prove that the value of cater-ing service was included in assessable value of the final product. The Tribunal agreed with the documents submitted by the assessee that the value of catering service was included in the value of the final product and held that since two views were possible, extended period of limitation could not be invoked.

    8. CENVAT Credit :

    i) Whether credit of additional tax paid by input service provider admissible :

L. G. Balakrishnan & Bros. Ltd. v. Commission-er of Central Excise, Trichy, 2010 (18) STR 432 (Tri- Chennai) :

The assessee took credit of additional tax paid by input service provider and subsequently recovered from the input service provider. Further, the al-legation of suppression of facts was established on input service provider. The credit of tax to the assessee was disallowed under Rule 9(1)(b) of the CENVAT Credit Rules, 2004.

The Tribunal held that Rule 9(1)(b) which relates to supplementary invoices, there is no mention of additional amount of service tax and there being no provisions to invoke provisions of Rule 9(1)(b), the demand was held unsustainable.

    ii) Whether credit admissible on plant housekeep-ing, factory garden maintenance, insurance and tours and travels expenses :

Balkrishna Industries Ltd. v. Commissioner of C.Ex., Aurangabad, 2010 (18) STR 600 (Tri-Mumbai) :

The assessee filed appeal to the Tribunal on denial of credit by lower authority on factory garden maintenance, plant housekeeping services. As regards insurance and tours and travels credit, it was denied on the grounds of non-availability of records.

The assessee pleaded that the case was covered by the decision of ISMT Ltd. v. CCE & Cus., Aurangabad (Tri-Mum.) with regard to plant house-keeping and garden maintenance service, where it was held that credit of such expenses was admissible. With regard to other two services, copies of invoices and records which were not placed before the lower authority were submitted and plea was made to remand the case to the adjudicating authority.

Based on the case of Chemplast Sanmar Ltd. v. CCE, Salem which stated that the definition of input services which includes activities in relation to business cannot be interpreted to include post-manufacturing activity, it was argued by the Revenue that credit was not admissible.

The Tribunal remanded the case back to adjudicat-ing authority in respect of Insurance service and tours and travels service. With regard to garden maintenance service, it was held that the garden creates better environment which increases work-ing efficiency of the factory and therefore credit is admissible.

    iii) Whether refund admissible when input service provider fails to deposit service tax :

Lason India Pvt. Ltd. v. Commissioner of Service Tax, Chennai, 2010 (18) STR 626 (Tri-Chennai) :

The assessee availed several input services which remained unutilised as services were exported. The original authority allowed refund of unutilised CEN-VAT credit. However, revision orders were passed disallowing part of the refund on the ground that input service provider did not deposit the amount to the Government. Rule 4(7) of the CENVAT Credit Rules, 2004 provides that credit in respect of input services shall be allowed on making payment of value of input service and service tax as indicated in the invoice. Based on Rule 4(7) (supra), it was held that credit was admissible.

    9. Classification :

    i) Whether repairs and maintenance done on job work taxable under ‘Management, maintenance, or repairs’ service :

Crimpson Electronics v. Commissioner of Central Excise, Kanpur, 2010 (18) STR 450 (Tri-Del.) :

The assessee registered under the Central Ex-cise Act, 1944 carried on the business as a job worker. The consideration received was towards job work and there were no records to show the consideration was received towards repairs and maintenance. The assessee challenged the order of the first Appellate Authority wherein it was held that assessee was providing service of repairs and maintenance. The Department argued that the activity carried out by the assessee was repairs and maintenance in guise of job work. The Com-missioner (Appeals) held that the activity was job work and not repairs and maintenance. As there was no records to prove the existence of service and in the absence of any contract, it was held that the activity was not liable to service tax.

    ii) Whether freight paid to owners is exigible to service tax under ‘Goods Transport agency service’ :

Bellary Iron & Ores Pvt. Ltd. v. Commissioner of C.Ex., Belgaum, 2010 (18) STR (Tri-Bang.) :

The assessee incurred freight for transportation of iron ore by trucks in private mines during 1-1-2005 to 31-3 -2006 and did not pay service tax under Goods Transport Agency (GTA) service. The Revenue confirmed the demand attracted in such cases and benefit of 75% abatement.

The assessee contended that the owners of trucks were not GTA and movement of iron ore within the mine during the processing or production or iron ore was not by ‘road’ as was commonly understood and hence the movement was not covered by GTA. Reference was made to CBEC Circular No. 232/02/2006–CX. 4 where it was clari-fied that the activity of handling and transportation of iron ore was liable to service tax under ‘Cargo handling service’ and export cargo was excluded from its definition. The supply of trucks by own-ers without transferring legal right of possession was taxable under ‘supply of tangible goods’. The amount paid was less than Rs.1,500 per trip and hence exemption was available.

The Minister of Finance while presenting the budget speech stated that there was no inten-tion to levy service tax on truck owners or truck operators.

The Commissioner held that the definition of GTA taxes only service provided in relation to transport of goods by road, mere transportation was not a taxable service. The owner of the goods carriage could not be said to be ‘goods transport agent of the owner.

In order to constitute service as GTA, there must be transport of goods by road. Here road is in-terpreted to mean as public road. As there were no roads in mines, provision of GTA service was held as not applicable.

    10. Export of Services :

    i) Whether conditions of Export of Services Rules fulfilled, if benefit accrues outside India :

KSH International Pvt. Ltd. v. Commissioner of C.Ex., Belapur, 2010 (18) STR 404 (Tri-Mumbai) :

The assessee procured purchase orders in India for suppliers of goods located abroad and transmit-ted the same by courier or electronic means to the said suppliers. Based on the purchase orders, the suppliers exported goods to buyers in India and directly collected payments from them. On receipt of sales proceeds, commission was paid to the assessee in convertible foreign exchange. Service tax was paid by the assessee on commis-sion income. Subsequently, claim for rebate was filed by the assessee under the Export Rules. The service rendered was classified under ‘Business Auxiliary Service’.

The lower authorities refused to accept the con-tention of the assessee that services provided by them to foreign suppliers were delivered outside India. Thus, the claim for rebate was rejected.

It was held that denial of refund of service tax was contrary to the express provisions of law as clarified in CBEC Circular No. 111/5/2009 where the phrase ‘delivery and use outside India’ is in-terpreted to mean that the benefit of the service should accrue outside India. Accordingly, since all the conditions of Export Rules were satisfied, the claim of rebate was held admissible.

    ii) Whether delivery of report outside India can be construed as part performance of service outside India :

Commissioner of Service Tax, Ahmedabad v. B. A Re-search India Ltd., 2010 (18) STR 439 (Tri-Ahmd.)

The assessee was engaged in the business of conducting clinical trial for clients in India and outside India which are classified under ‘Technical Testing and Analysis’. The assessee claimed exemp-tion under Export of Services Rules, 2005 when the report was delivered to the client outside India. The Department raised demand by issuing show-cause notice as the services were wholly performed in India. The assessee preferred an ap-peal with the Commissioner (Appeals) which set aside the demands and penalties imposed.

The Department argued that testing and analysis were performed wholly within India and report sent outside India is secondary aspect. Thus entire services were performed wholly within India and accordingly such services cannot be termed as ‘export outside India’.

On examining Export Rules, it was found that technical testing and analysis service is classified under Category II, wherein in order to constitute export, the service must be necessarily partly or fully performed outside India. The performance of service is not complete unless report is submitted to foreign clients, so it can be construed that service is partly performed outside India. Further, delivery of report is essential part of service and it is not complete unless report is delivered outside India. Accordingly, it was held that such service is not taxable and benefit under Export Rules is available.

    11. Refund :

Whether the Department was right in recovering refund granted erroneously without initiating re-view proceedings or filing an appeal :

Ogilvy & Mather Pvt. Ltd. v. Commissioner of Service Tax, Bangalore, 2010 (18) STR 502 (Tri-Bang.) :

The appellant paid excess service tax and had issued credit note to clients for extra service tax recovered and then filed a claim for refund. The Assistant Commissioner rejected the claim on the ground of limitation, but held that refund would not entail unjust enrichment. The said order was upheld by the Commissioner (appeals). However, the Tribunal allowed the assessee’s appeal by re-manding it back to the adjudicating authority in de novo proceedings. The Assistant Commissioner found that the refund claim was barred by limita-tion, but held that doctrine of unjust enrichment was not applicable.

The Commissioner (Appeals) held that the refund claim was filed in time. However, to examine the aspect of unjust enrichment the case was directed to the lower authorities who held that there was no unjust enrichment and the refund was granted to the assessee.

Subsequently, the Assistant Commissioner issued a show-cause notice u/s.11A to recover the refund sanctioned erroneously. The said order was confirmed and affirmed by the Commissioner (Appeals) and therefore, the present appeal by the appellant on the following grounds :

  •     The adjudication order was appealable and legal course open to the Department was to file an appeal.

  •     Since no review was undertaken, the order is illegal.

  •     Since refund claims were sanctioned by the Revenue, reopening of matter by issue of a show-cause notice without filing an appeal is not maintainable.

  •     The Commissioner passed such order relying on cases having dissimilar facts.

  •     The Tribunal in the case of Jindal Aluminium Ltd. [Order-In-Appeal No. 160/2002-CE of Com-missioner (Appeals), Bangalore] had held that refund should be granted if credit note was issued to the clients for excess service tax re-covered. The said decision was not challenged and therefore, the Department cannot take a different stand in the present case.

  •     The refund sanctioned could not be demanded as erroneous refund invoking S. 11A of the Central Excise Act without simultaneously invoking S. 35E of the Act. The quasi-judicial authority cannot review its own order, unless the power of review is expressly conferred by the statute.

  •     A refund made pursuant to an Appellate order could not be said to have been made erroneously.

    

  • The High Court judgment relied by the Department was distinguishable and was not squarely applicable to the present case.

The Department’s grounds were as under :

  •     Reliance was placed on the Tribunal’s decision in CCE v. Addison & Co., 1997 (93) ELT 429(T).

  •     Duty erroneously refunded could be validly recovered u/s.11A of the Central Excise Act, 1944 without filing an appeal against such order.

  •     The Apex Court in the case of M/s. Sangam Processors had held that if credit notes issued to customers after collecting excess amounts of duty at the time of clearance of goods, the assessee cannot validly claim refund and doc-trine of unjust enrichment was still attracted.

The Tribunal made the following observations :

  •     S. 73 of the Finance Act, 1994 deals with re-covery of service tax erroneously refunded and S. 11A of the Central Excise Act, 1944 are pari materia and therefore both the parties have relied on cases pertaining to S. 11A.

  •     Relying on the ratio laid by the Supreme Court in Indian Dyestuff Industries Ltd. v. Union of India, recovery of erroneous refund can be made u/s.11A of the Central Excise Act, 1944 without firstly filing an appeal against such an order.

  •     Principle of unjust enrichment is fully appli-cable in the present case as once the duty incidence is passed on to the customers at the time of clearance of goods, the assessee would not be entitled for refund.

  •     S. 11A and S. 11B are independent provisions and their effect cannot be taken away by resorting to the provisions of S. 356A or S. 35E.

  •     There being substantive provisions of S. 11A of the Central Excise Act, 1944, the argument that quasi-judicial authority cannot review its own order does not merit any stand. It was held that the order being in accordance with law, the appeal was dismissed.

    12. Service tax applicability :

i) Whether manufacture of alcohol-based perfumes and pharmaceutical products liable to service tax :

SPA Pharmaceutical Pvt. Ltd. v. Commissioner of C.Ex. & S.T., Aurangabad, 2010 (18) STR 421 (Tri-Mumbai) :

The assessee undertook activity of manufacturing alcohol on job work basis for various input sup-pliers and contended that it was excluded from the purview of ‘business auxiliary service’ as it amounted to manufacture.

The legal position being covered under Circular F. No. 249/1/2006–CX.4, dated 27-10-2008 and also that the issue was decided by the Tribunal in the case of Rubicon Formulations Pvt. Ltd. v. Commis-sioner of Central Excise, Aurangabad Final order No. A/281/2009-WZB/C-II/CSTB of 19/11/2009 wherein it was held that the appellants were not liable to service tax for this activity.

Based on this ratio, it was held that manufactur-ing was excluded from the purview of ‘business auxiliary service’ and as such, demand and penalty were not sustainable.

    ii) Whether Explanation given to a Section to be given retrospective effect :

B. A. Research India Ltd. v. Commissioner of Service Tax, Ahmedabad, 2010 (18) STR 604 (Tri-Ahmd.) :

The assessee was engaged in the activity of clinical research/testing and analysis for various phar-maceutical companies. The category of technical testing and analysis service was made taxable w.e.f. 1-7-2003. Explanation was introduced in the definition on 1-5-2006 by which testing and analysis for the purpose of determination of the nature of diseased condition, identification of disease, prevention of disease or disorder in human beings or animals was included.

    A show-cause notice was issued to the assessee for recovering service tax for the period 1-7-2003 to 1-5-2006. The issue which arose was whether Explanation was to be given retrospective effect. Relying on the case of Sedco Forex International Drill Inc. v. Commissioner of Income-tax, 2005 (12) SCC 717 and several other cases, the assessee contended that it could not be retrospective.

Citing the case of Epco India Pvt. Ltd., 2008 (84) RLT 428 (Tri.), the Department argued that since the explanation starts with ‘For removal of doubts’ it had retrospective effect.

The Tribunal held that the Explanation introduced by way of amendment was to make clear that the definition included testing and analysis undertaken for the purpose of clinical testing of drugs and formulations were earlier excluded in the original definition. The amendment expanded the scope of definition and therefore could not be given retrospective effect.

    iii) Whether turnkey contracts can be vivi-sected and service tax be levied on service portion involved in execution of such turnkey contracts :

Commissioner of Central Excise, Raipur v. BSBK Pvt. Ltd., 2010 (18) STR 555 (Tri-LB) :

The company entered into one single contract involving handing over of the plant in running condition to the principal, after completing vari-ous works including designing and engineering, civil works, steel structures, erection, testing and commissioning of the plant, etc. They contended that the dominant nature test should be applied for determining type of contract and only divis-ibility of contract cannot be a relevant consid-eration for taxing service tax on service part of such contract.

The Referring Bench had the following views :

  •     Daelim case is not in consonance with the BSNL case delivered by the Supreme Court, wherein it was held that a turnkey contract cannot be vivisected. However, the Revenue had filed appeal in the Supreme Court which was dismissed. However, the Bench observed that summary rejection of the SLP or appeal cannot be construed as affirmation of the judg-ment. It only means that the Supreme Court declined to interfere with the judgment.

  •     By 46th amendment to the Constitution of India, Article 366(29A) was inserted, to con-sider the following three kinds of composite contracts to be ‘deemed sale’ :

    Works contract

    Hire purchase contract and

    Catering contract

Of these three, first and third involve service and sale at the same time and splitting is permitted constitutionally. However, there is no other kinds of contract for which splitting is permitted, say, hospital services.

  •     In the case of ‘turnkey contract’, if sale portion is leviable to sales tax, the remaining portion constituting taxable service cannot go untaxed and the same would be liable to service tax.

  •     The test for composite contracts other than those mentioned in Article 366(29A) continues to be as per the ratio elucidated in Gannon Dunkerley’s case. i.e., to say, did the parties have in mind or intend separate rights arising out of the sale of goods ? If there was no such intention, there is no sale even if the contract could be disintegrated.

  •     It would thus follow that the dominant nature test cannot be applied in the case of works contract falling under clause (b) of Article 366(29-A). If ‘works contract’ can be split into sale contract and service contract, a different treatment may not be given to any works contract simply because the contract is on a turnkey basis.

The arguments put forward by the Revenue were as under :

  •     If taxable services are involved in a composite contract and such element can be discerned, then it is liable to service tax. The reason being service is service whether provided independently or in combination with other activities.

  •     After 46th Constitutional amendment, every con-tract whether indivisible, composite or turnkey involving goods and services are made divisible and would be leviable to sales tax on sale element and service tax on service element.

  •     There are no express provisions of law to exclude turnkey contracts from service tax levy and therefore, service tax should be levied on service element of such contracts.

  •     Daelim’s case had not followed the ratio laid down by the Supreme Court in BSNL and 46th amendment to the Constitution of India.

  •     The aspect theory would not apply to enable the value of services to be included in the sale of goods or price of goods in value of the service.

  •     In case of turnkey contracts, irrespective of percentage of service element involved, such element shall be taxable by the provisions of the Finance Act, 1994.

  •     In the judgment of BSNL v. Union of India, 2006 (2) STR-2006 (2) STR 161 (SC), the Supreme Court has held that if there is a composite contract and the transaction in truth represents two distinct and separate contracts and is discernible as such, it has become per-missible to separate agreement to sale from the agreement to render service.

The respondent argued as follows :

  •     Since the original order of the Tribunal was passed ex parte and when the case was referred to Larger Bench, the findings in ex parte order are baseless and the Larger Bench should not rely on the same.

  •     A turnkey contract is a contract which is indivisible and cannot be vivisected to determine the service tax liability due to dominant intention theory.

  •     Works contract is liable to service tax from June 2007 and therefore, prior to that, turnkey contract cannot be divided to determine the value of service if separate consideration is not paid for such service.

  •     The ratio of BSNL case is not practical to severe turnkey contract into supply contract and service contract to levy tax on minor portion of services involved, which is not dominant object.

  •     Fiction of law in Article 366(29-A) of the Constitution is application to only sale of goods and not to service elements involved in such a composite contract.

  •     Execution of turnkey contract is not complete until the assessee carries out its entire obligation imposed upon it under such contract.

  •     Circular No. 334/4/2006-TRU, dated 28-2-2006 has clarified that when a composite service, even if it consists of more than one service, should be treated as a single service based on the main or principal service and accordingly classified. Therefore it is impracticable to classify various services involved in turnkey contract. Accordingly predominant test does not bring services of turnkey contract into tax net.

  •     In case of Larsen & Toubro Ltd., 2006 (4) STR 63 (Tri-Mumbai) it was held that rendering of engineering and designing service in a turnkey contract is not covered under the category of ‘consulting engineering services’.

The observations of the Larger Bench are summarised hereunder :

  •     The validity of levy of service tax constitutionally may be decided only on the basis of laws laid down by the Apex Court in various decisions. Accordingly, it was observed that a new Entry 92C was introduced in the Union List for the levy of service tax.

  •     As held by the Apex Court in All India Federa-tion of Tax Practitioners, there is no difference between production or manufacture of sale-able goods and production of marketable/ saleable services.

  •     According to the aspect theory, there might be overlapping of taxes, but such overlapping must be in law and it is open to a Legislature or more than one Legislature to impose a tax on that particular ‘aspect’ of the transaction which is within its legislative competence.

  •     In case of divisible contract, after 46th amend-ment, it is possible to levy Sales Tax on goods price.

  •     Rule 2A of Service Tax (Determination of Val-ue) Rules, 2006 was introduced w.e.f. 1-6-2007 to precisely value service elements involved in contracts involving goods and services.

  •     For the purpose of interpretation of a taxing statute, principle of purposive construction should be applied to find out object of the Act and to seek reasonable result and it should not to be interpreted in a manner to defeat its spirit.

  •     Severability of composite and turnkey contract permitted by Article 366(29-A)(b) cannot be said to have been for the mere purpose of levy of sales tax.

  •     Turnkey contracts can be vivisected and dis-cernible service elements involved therein can be segregated and classifiable as well as valued for levy service tax under the Finance Act, 1994.

[Note : Since this decision overrules Daelim’s decision 2006 (4) STR 63 (Tribunal), there would be widespread implications on litigation process as Daelim’s decision (supra) has been followed by Tribunals in several cases.]

    iv) Whether once designs and drawings are imported and considered goods for customs purposes, can they be treated as service ? :

Mitsui & Co. Ltd. v. Commissioner of Central Excise, Jamshedpur, 2010 (18) STR 632 (Tri-Kolkata) :

The appellant entered into contract for supply of imported designs and drawings, provision of foreign technician’s services for supervision of detailed engineering in India, manufacture of indigenous equipment, erection, start-up, commissioning, demonstration of performance guarantee tests and training at supplier’s works.

The appellant contended that at the time of im-port, designs and drawings were assessed to the Customs Act as goods and therefore, the value of these cannot be taken into consideration for the purpose of service tax. Similarly, the drawings and designs originating in India are also considered as goods under the Central Excise Tariff and with respect to commissioning and erection services, it was introduced under the scope of service tax w.e.f. 1-7-2003. However, the present contract was for the period from April 1999 to November 2001.

The Department contended that supply of designs and drawings was a service liable to service tax under the category of ‘Consulting Engineering Services’ and though erection and commissioning service was made taxable w.e.f. 2004, the same was to be treated as part of consulting engineering service as this service included not only advisory consultative assistance but also implementation of such advice.

Finding that the designs and drawings as services not sustainable, the order was set aside and the matter was remanded to the adjudicating authority for de novo adjudication.

    v) Whether service tax could be levied on a works contract after 46th amendment but prior to introduction of ‘works contract’ under service tax net :

Commissioner of Central Excise, Raigad v. Indian Oil Tanking Ltd., 2010 (18) STR 577 (Tri-Mumbai) :

The assessee claimed refund of service tax paid under the category of ‘commissioning and instal-lation’ services for the month of September and October, 2003 on the ground that lump sum turn-key works contract could not be vivisected and part of it subjected to tax, the decision of which was delivered by the Tribunal in Daelim Industrial Company v. CCE, 2006 (3) STR 124 and upheld by the Apex Court and also in Larsen & Toubro Ltd. v. CCE, 2006 (3) STR 223 (Tri.-Del.).

On scrutiny, it was observed by the Department that the prices were separately quoted on ac-ceptance letter for detailed engineering, supply portion and construction and erection portion. However, the assessee claimed that the separation was made only for breaking up billing schedules and hardly 3% of the total contract value may be considered as price for detailed engineering and the assessee had carried out only certain residual process designs.

The Tribunal observed :

  •     The Daelim’s case held that the contract en-tered was a works contract on turnkey basis and not a consultancy contract and that the works contract could not be vivisected for a part of it to be subjected to service tax.

  •     The Tribunal consistently held as above.

  •     The Daelim’s case is not per incuriam and is binding on the Tribunal as the Apex Court while dismissing the Special Leave Petition (SLP) passed the order that ‘we see no reason to interfere the SLP is dismissed’. This order indicates that the merits of the Tribunal’s judg-ment were examined by the Supreme Court.

  •     In the case of Diebold Systems (P) Ltd., 2008 (9) STR 546 (T), it was held that there was no taxable event defined under the Finance Act, 1994 for levy of service tax in respect of indivisible works contract prior to 1-6-2007. The same was approved by the High Court and therefore, such decision has a binding effect on this Bench of the Tribunal.

  •     The Tribunal’s decision in BSBK Pvt. Ltd. v. CCE, 2007 (5) STR 124 has been set aside by the Apex Court on the ground that it was an ex parte order.

  •     The 46th amendment, in respect of Entry 54 of List II of the Seventh Schedule to the Constitution, is for levy of Sales Tax. However, there was no provision of law during the period in dispute for levy of service tax on deeming fiction since such a provision is introduced only w.e.f. 1-6-2007 under ‘works contract’ service.

  •     The High Court in the case of Indian National Shipowners Association (INSA) has held that the introduction of new Entry and inclusion of certain services in that Entry would pre-suppose that there was no earlier Entry covering the said services.

  •     The Builders’ Association case delivered by the Apex Court has been considered by the Tribunal. However, the same being in the context of sales tax, does not have any effect on the present case.

    

  • The Apex Court in the case of Associated Cement Companies Ltd. v. CC, 2001 (128) ELT 21 (SC) has held that subsequent to 46th amendment, the State would be empowered to levy sales tax on materials used in a contract of designs, drawings, manuals, etc.

  •     In the case of BSNL v. UOI, 2006 (2) STR 161(SC), it was held that the ratio of decision delivered in Associated Cement would not be applicable in respect of a composite contract and that the 46th amendment was to over-come the earlier decision of the Apex Court for transactions relating to deemed sales only.

  •     The intention of the Legislature was to tax only the labour portion under ‘Works Contract’ Service as envisaged under Rule 2A of the Service Tax (Determination of Valuation) Rules, 2006 and therefore, service tax cannot be levied on entire contract value.

  •     The Revenue’s contention that the activities are akin to ‘consulting engineering’ services does not hold good as it was clarified that charges for erection, installation and commissioning are not covered under the category of consulting engineering services and the same would be taxed separately.

It was held that there was no direct decision in favour of the Revenue for levy of service tax on service component of a works contract prior to 1-6-2007. On the contrary, the High Court decision in the case of Indian National Shipowners Associa-tion (supra) is directly against the Revenue and it has a binding effect on the Bench of the Tribunal, therefore, the appeal of the Revenue is rejected.

[Note : This decision and the above-cited reported Larger Bench decision in the case of BSBK at 12(iii) being contradictory would make the litigation process murkier on the subject matter].

    13. Valuation :

Whether value of free supplies is includible ?

Jaihind Projects Ltd. v. Commissioner of Service Tax, Ahmedabad, 2010 (18) STR 650 (Tri- Ahmd.)

The appellant, engaged in laying of pipelines, is covered by ‘Commercial or Industrial Construction Service’ availed abatement of 67% vide Notifica-tion No. 15/2004 and paid service tax on balance amount excluding value of free supplies. The abate-ment was denied on the ground of non-inclusion of value of free supplies of pipes by the service recipient used in construction services. Penalty also was levied u/s.76 and u/s.78. The appellant contested that the value of free supplies is not includible in gross amount charged, as appellants have not charged anything for free supplies.

Based on the decision in the case of Oblum Electri-cal Industries Private Limited v. CC, Bombay, 1997 ELT 449 (SC), the appellant contended that explanation cannot expand the scope of main operative part of Notification. The main operative part of Notification No. 15/2004 provides that tax will be charged on 33% of gross amount charged and its explanation reads ‘gross amount charged shall include the value of goods and services sup-plied or provided or used by the service provider for providing such service’. As such, the words, ‘supplied or provided’ given in the notification are to be read in context with supply of goods by service provider and not the service receiver. They also referred the decision of P. Chandran v. CCE, 2008 (12) STR 33 where CESTAT has held that the word ‘used’ is to be read as supplied and used by service provider and so the value of free supplies is to be excluded from gross amount charged. They also referred to Notification No. 12/2003 stating that it applied to goods sold to service recipient and did not cover free supplies by service recipient.

The CESTAT opined that the case was covered by Rule 3 of the Service Tax (Determination of Value Rules), 2006 providing for valuation of services. The said Rule provides that value of consideration would be the gross amount charged inclusive of monetary and non-monetary consideration and where such valuation is not possible, the gross amount charged would be money equivalent to consider-ation charged and in no case it would be less than the cost of provision of service. It also states that proviso to the Notification only explains when and how the benefit of this Notification can be taken. The explanation in current case is only explaining actual meaning of ‘gross amount charged’ and does not expand the scope of main operative part of Notification. So, the value of free supplies is to be included in the gross amount charged.

The Tribunal held that the case of P. Chandran (referred supra) was only a stay order and the matter would not have been considered in depth. So for the interpretation of word ‘used’, the case cannot be relied upon and the value of all supplies is to be included in the gross amount charged, irrespective of the source of supply if the goods are used in providing the service.

The Tribunal waived the penalty u/s.78 stating that the matter involved was of interpretation of law. However, the matter was remanded back to the adjudicating authority to revise the duty demanded and the penalty u/s.76 was also left to be decided by him.

Part B — Some recent landmark judgments

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I. High Court :

1. Services provided abroad : Used by Indian persons : From when did
service tax apply ? A landmark decision :

Indian National Ship Owners Association v. UOI, 2008
TIOL 633 HC MUM-ST, Writ Petition No. 1449 of 2006 — Judgment dated 11-12-2008.


(i) By way of a writ petition, the petitioner association had
challenged constitutional validity of S. 66A of the Finance Act, 1994 (The Act),
explanation to S. 65(105) of the Act (in force from 16-6-2005 till 17-4-2006)
and Rule 2(1)(d)(iv) of the Service Tax Rules, 1994 (the Rules). However, no
relief was pressed under the said S. 66A. The challenge therefore
was restricted to the demand of service tax made by the Department for the
period from 16-8-2002 to 17-4-2006 (i.e., prior to the enactment of S.
66A) in respect of services by persons from outside India and rendered outside
India to the persons resident in India but who received services outside India.

 

(ii) The Hon. High Court took note of and examined the
following :


  • Board’s Circular No. 36/04/2001, dated 8-10-2001


  • Scope of S. 64 of the Act


  • Notification No. 1/2002-ST, dated 1-3-2004


  • Notification No. 36/2004-ST, dated 31-12-2004 (effective from 1-1-2005)


  • Rule 2(1)(d)(iv) of the Rules along with the amendments from time to time.


  • S. 68(2) of the Act.


  • Explanation below S. 65(105) of the Act (In force from 16-6-2005 till
    17-4-2006)


  • S. 66 of the Act — the charging Section


  • Overall scope of S. 65 including that of S. 65(105).


(iii) The
Court relied on the following decision :

Laghu Udyog
Bharati v. Union of India, 1999 (112) ELT 365 (SC).

(iv) After
considering submissions made by both the sides, the findings of the Court are
briefly summarised here in below :


  •  Referring to Article 265 of the Constitution, the Court stated that no tax
    shall be levied or collected except under authority of law and therefore,
    examination was necessary as to whether or not there was a valid law between
    1-3-2002 and 12-4-2006 which authorised to levy service tax on services
    rendered outside India.


  •  As regards Notification No. 1/2002-ST, the Court stated that the said
    Notification extended territorial limits of India to the designated areas in
    the continental shelf and Exclusive Economic Zone of India and therefore, this
    Notification did not have effect of levying service tax on the recipients of
    services.


  •  In the context of Rule 2(1)(d)(iv) of the Rules, it was observed that S. 64
    empowered the Central Government to make rules for carrying out provisions of
    Chapter V where a service provider was considered an assessee and services
    provided were taxed. The rules could not be framed to be in conflict with
    provisions of the chapter. If the Act made the person providing the service
    liable, the Rule could not make the recipient liable and thus the provisions
    of Rule 2(1)(d)(iv) were invalid.


  • While examining Notification No. 36/2004-ST (supra) on which reliance
    was placed by the authorities, the Court observed that S. 68(2) authorised the
    Government to notify any taxable service for which rules could be framed. Vide
    Notification No. 36/2004 (supra), any taxable service provided by a
    non-resident or a person from outside India was notified and if rule 2(1)(d)(iv)
    was taken to be the rule pursuant to this provision, then a person receiving
    taxable service in India from a non-resident or from a person outside India
    would become taxable and not services rendered outside India by a non-resident
    or a person from outside India.


  • Vis-a-vis explanation below S. 65(105) from 16-6-2005, the Court found that the explanation did not authorise the Government to levy service tax in relation to services rendered to vessels and ships of the members of association outside India. In this frame of reference, the Court observed and relied on the case of Laghu Udyog Bharati (supra), wherein the Supreme Court by its judgment clearly laid down a law that by making a provision in the Rules, the levy of service tax could not be shifted to recipients of the services. It further noted that this law squarely applied to Rule 2(1)(d)(iv) also. According to the Court, in spite of the explanation, which made services provided outside India taxable, the charge of the tax continued to be on the provider of service as per scheme of the Act.

  • At the end, the Court  ruled that  on amending the Act and inserting S. 66A that the Government got legal authority to levy service tax on recipients of taxable services and before the enactment of S. 66A, no authority was vested by law and therefore, only from 18-4-2006 the recipients could be deemed to be service providers and thus would be liable for service tax in respect of services received from abroad and accordingly, restrained the Government to levy service tax on the members of the petitioner association for the period from 16-8-2002 till 12-7-2006.

(v) Comments:

In the judgment in the case of Hindustan Zinc Ltd. v. CCE, [aipur, 2008 (11) STR 338 (Tri.-LB) (narrated under this feature at length in September 2008 issue of BCAn, no distinction was made between services provided in India by a person from outside India and services performed outside India. As such, the issue of taxability on services provided outside India remained open for the period from 1-1-2005 to 17-4-2006. Decision in the case of Foster Wheeler Energy Ltd. v. CCE Vadodara Il, 2007 (7) STR 443 (Tri.-Ahd), on the other side provided that prior to insertion of S. 66A i.e., 18-4-2006, the recipient could not be made liable for service tax in respect of offshore services provided by person from outside India. However, the validity or otherwise of Rule 2(1)(d)(iv) was not examined, nor was examined the distinction be-tween scope of provision of Notification No. 36/ 2004-ST and that of S. 66A. Only in the case of Sterlite Industries (India) Ltd. v. CCE, 2008 (11) STR 325 (Tri.-Chennai), the issue as a whOle and distinction between coverage of Notification No. 36/2004 and scope of S. 66A was presented by the appellant. However, it being only a stay application, no finality was reached. Hon. Bombay High Court has dealt with all issues concerning services provided by persons from outside India and the liability of Indian receivers vis-a-vis such services, except examining constitutional validity of the extra-territorial jurisdiction of the levy.

2. Handling of export cargo whether liable to service tax?
CCE, Mangalore v. M/s. Konkan Marine Agencies, [2008 TIOL 601 HC Kar. ST]

The assessee paid service tax under the category of ‘port service’ for the period March 2004 to September 2004 and filed a refund claim of service tax and interest paid, stating that they were handling only export cargo which was outside the purview of service tax under ‘cargo handling service’ and that they had erroneously paid service tax under port services. The claim was rejected considering the services as port services. The Commissioner (appeals) remanded the matter to the adjudicating authority to determine the nature of the service. On examination, it was decided to be ‘cargo handling service’, however the refund was directed to be paid to the Consumer Welfare Fund.

The Commissioner took suo motu revision against the order of the adjudicating authority u/ s.84 and held that the services were port services, therefore, refund stood rejected. The assessee filed an appeal before the CESTAT.After relevant findings, CESTAT held that the assessee was not rendering services on behalf of port, but on its own behalf to customers for loading of export cargo. Accordingly, the Revenue’s appeal was dismissed in limine.

3. Whether reimbursement of expenses part of service rendered ?

Intercontinental Conslt. & Tech. Pvt. Ltd. v. Union of India, 2008 (12) STR 689 (Del)

The petitioner challenged constitutional validity of Rule 5 of the Valuation Rules, 2006 as it is ultra vires provisions of S. 66, S. 67 and Chapter V of the Finance Act, 1994 for inclusion of reimbursement of expenses as part of value of services.

The petitioner paid service tax only on services rendered to clients (NHAI) and not on reimbursement of expenses.

The authorities treating reimbursement of expenses as forming part of gross value of taxable services as per S. 67 and Rule 5, issued show-cause notice. The appellant contended that such expenses did not form part of value of services rendered and therefore was not liable u/ s.67 and further that reimbursable expenses were shown separately in the bill issued to clients.

It was held that no coercive steps be taken till an adjudication order was passed, but proceedings for SCN could continue.

II. Tribunal:’
4. Banking and other Financial Services:
CCE, [aipur v. Bank of Rajasthan Ltd., (2008 TIOL 1866 CESTAT Del.)

The Revenue had appealed against the order of the Commissioner (Appeals) whereby’ Anywhere Banking Business (ABB) transactions’ were held not liable to service tax. The respondent contended that ABB came under the net of service tax w.e.f. 10-9-2004, therefore, prior to 10-9-2004 this service was not chargeable to service tax. As this service was only for operation of bank account, the Revenue’s appeal was dismissed. No infirmity in the order.

5. Business Auxiliary Service:
APL Logistics India (Pvt.) Ltd. v. Commissioner of Service Tax, Chennai, 2008 (12) STR588 (Tri.-Chennai)

The appellant was in the business of collecting export goods from different Indian suppliers for a foreign party under an agreement with the latter. Such goods were consolidated into one cargo and exported for a consideration in Indian rupees. Thus, the appellant was undertaking the activity of handling of export cargo that is excluded from the ambit of cargo handling service. The Revenue contended to tax this activity as ‘Business Auxiliary Service’ as services were provided on behalf of client. The decision of Dr. Lal Path Lab Pvt. Ltd. v. CCE; Ludhiana, 2006 (4) STR 527 (Tribunal) was relied upon and contention was made that handling export could not be brought within the scope of ‘provision of service on behalf of the client’ as well as ‘cargo handling service’. Since the matter involved detailed examination for Revenue’s claim, waiver of pre-deposit was granted.

6. CENVAT Credit :
(i) Whether TR-6 challan a valid document?

M/s. Gaurav Krishna Ispat (I) Pvt. Ltd. v. CCE, Raipur (2008 TIOL 1979 CESTAT Del.)

The assessee was denied Cenvat credit for the period prior to 16-6-2005 as TR-6 challan was considered as an invalid document for availing the same.

It was held by the Commissioner (Appeals) that it was an inadvertent omission of not including TR-6 challan as a valid document, which was rectified by Notification. The Tribunal’s decision of National Organic Chemicals India Ltd., 2004 (178) ELT 331 (Tribunal) was also relied upon. It was held that CENVAT credit could not be denied and penalty could not be sustained.

(ii) Can CENVAT credit be denied on procedural ground?

M/s. Bharat Sanchar Nigam Ltd. v. CCE, Salem, (2008 TIOL 1989 CESTAT-Mad.)

BSNL divided the country into what they called Secondary Switching Areas (SSAs) and had a Central Stores Dept. (CSD) at Madurai, which catered the SSAs by purchasing and supplying capital goods required for rendering telephone services. The lower authorities denied the credit taken by SSA, Salem on capital goods supplied by CSD covered by copies of manufacturer’s invoice, on the ground that the credit was taken without issuing invoices as registered first stage dealer in accordance with Rule 9.

However, the appellant’s contention that credit could not be denied on technical grounds as the two substantive conditions (a) that the capital goods must be duty paid, and (b) that they should be used in rendering of output service were satisfied.

On finding that CSD was registered at a later date as a first stage dealer, the credit was allowed.

iii) CENVAT credit: Consignment agent’s place – whether place of removal?

CCE, Rajkot v. Rajhans Metals Pvt. Ltd., (2008 TIOL 1871 CESTAT-Ahm.)

The assessee availed Cenvat credit of service tax paid on transportation service availed for movement from factory to consignment agent’s premises. The property of the goods did not transfer to the agent. The Revenue claimed that only depots could claim credit as per Board’s Circular, therefore Commissioner (Appeals)’ s extension of benefit was incorrect. It was contended that the Circular discussed the place of removal, wherein consignment agent’s premises has been defined as place of removal. It was held that the fact that expenses are borne by manufacturer, property of goods does not get transferred and the consignment agent’s premises are defined as the place of removal makes them eligible for Cenvat credit.

iv) CENVAT credit on capital goods when goods received at one place and invoice issued in the name of other:

M/s. BSNL v. CCE, Bhopal (2008 TIOL 1938 CESTAT-Del.)

The Revenue denied the credit on the ground that the credit was availed on the strength of improper document. It stated that the invoices were in the name of Headquarter Bhopal, whereas credit was taken at Jabalpur on the strength of debit notes. However the appellant contented that invoices for capital goods received at Jabalpur were issued in the name of circle Headquarter i.e., Bhopal, and Jabalpur comes under the Bhopal circle. Further, there was no dispute as to payment of duty on those capital goods and they were used for providing output service. Finding merit in the contention, waiver of pre-deposit and penalties was granted.

7. Commercial Training and Coaching Services:

M/s. Administrative Staff College of India, Hyderabad v. The CCE, Hyderabad (2008 TIOL 2007 CESTAT-Bang.)

The appellant is a college for practising managers that pioneered post-experience management education in India. The Revenue proceeded on the grounds that they did not pay service tax on services rendered as ‘Commercial Training or Coaching Centre’ and ‘Scientific or Technical Consultancy’. The Revenue contended that any institute satisfying this definition would be liable for service tax, irrespective of whether it was a commercial institute or not and that the college was recognised as a research institute by the Ministry of Science & Technology and as such, they were covered as Scientific and Technical Consultant.

However, it was held that the word ‘commercial’ qualified the commercial coaching or training. It did not qualify coaching or training, but qualified the centre. As long as the institute was registered under the Societies Registration Act and also exempted from income-tax, it cannot be considered as commercial and so no service tax was leviable under Commercial Coaching or Training Service. As regards Scientific and Technical Research, it was held that the appellants carried out research broadly in the field of social sciences, which was not considered ‘Scientific and Technical Consultancy’, and hence no service tax was leviable and the appeal was allowed on both the counts.

8. Import    of services:

Nestle India Ltd. v. Commissioner of Service Tax, New Delhi, [(2008 (12) STR 570 (Tri.-Del.)]

Service tax was demanded under consulting engineer services for import of services. The appellant received service of consulting engineer from their holding company and the period under dispute was 6-8-2002 to 9-9-2004. The Larger Bench of the Tribunal’s decision in the case of Hindustan Zinc Ltd. v. CCE, 2008 (11) STR 337 (Tri.-LB) was followed, finding the facts of the case similar and relief was provided for the period prior to 1-1-2005.

9. Revisionary authority – Whether can revise the decision taken u/s.80 ?
M/s.  Solomon Foundry  v. CCE, Tiruchirapalli, (2008 TIOL 1826 CESTAT-Mad.)

The assessee entered into a contract when the service of maintenance and repair was not under the tax net, therefore the contract did not contain any provision to recover the service tax from its clients and hence the tax liability was absorbed and lenient decision was prayed for. The original authority considered that default in payment of service tax was because of bona fide belief as to non-taxability. The amount due was mostly paid before the issue of show-cause notice and the remaining before the decision of adjudicating authority.

The Tribunal allowed the appeal and held that the revisional authority does not have powers to revise a decision of competent authority, which had refrained from imposing penalty on the assessee ul s.80 of the Act.

10. Stevedoring a port service? Homa Engineering decision disregarded with issue referred to Larger Bench:

Western Agencies Pvt. Ltd. v. Commissioner of Service Tax, Chennai, 2008 (12) STR 739 (Tri.-Chennai)

In this case, the issue relates to whether or not services other than stevedoring activity could be considered as port services. The Tribunal has dif-fered from the decisions taken in the following cases:

  • Homa Engineering Works v. Commissioner, 2007 (7) STR 546 (Tribunal)
  • Kin-Ship Services (India) Pvt. Ltd. v. Commissioner, 2008 (10) STR 331 (Tribunal)
  • Konkan Marine Agencies v. Commissioner, 2007 (8) STR 472 (Tribunal)
  • Velji P. and Sons (Agencies) Pvt. Ltd. v. Commis-sioner, 2007 (8) STR 236 (Tribunal)
  • Western (I) Shipyard Ltd. v. Commissioner, 2006 (3) STR 639 (Tribunal)
  • Western India Shipyard Ltd. v. Commissioner, 2008 (15) STT 371 (Mum-CESTAT)

Briefly stated, the Revenue contended that the Apex Court dismissed the Department’s appeal against Tribunal decision in Velji’s case (supra) not on merits but for the reason that no appeal against the Tribunal’s order in Homa Engineering (supra) was filed. However, the appeal in Homa Engineering’s case (supra) has been subsequently filed in the Bombay High Court. Therefore, the Tribunal’s de-cision could not be deemed to have been affirmed on merits in case of Velji’s by the Apex Court. It was also observed by the Tribunal that port services of minor ports were governed by the Indian Ports Act, 1908 and major ports by the Major Port Trust Act, 1963 whereas in Velji’s case, services in question were minor port services and decision was rendered with reference to many provisions of the Major Port Trust Act which did not apply. Further, the Tribunal observed that the view taken to the effect that licence issued by the port was unrecognised as authorisation also seemed incorrect. In the case of Konkan Marine Agencies (supra) it was concluded that stevedoring licence issued by the Mangalore Port Trust permitted them to perform within port premises.

According to the Tribunal, cargo handling services i.e., loading and unloading of cargo when performed within territorial limits of minor and major ports qualify to be ‘port services’. Port service can be performed from premises only if authorised by major port or minor port authorities and therefore stevedoring operations performed from port premises were port services. However, considering the importance of the issue and disagreement made with the decision in the above mentioned cases, the matter was referred to the Larger Bench.

11. Turnkey contracts – Daelim’s decision to be examined by Larger Bench:

CCE, Raipur v. Mls. BSBK Pvt. Ltd., (2008 TIOL 1880 CESTAT-Del.]

The respondent was engaged in the business of execution of turnkey contracts for engineering works at the site of their clients. The authorities ordered the respondents to pay service tax and penalty on these contracts to which the respondents appealed before the Commissioner (A) who set aside this order.

Relying on various decisions which inter alia included the decisions on the cases of Daelim Industrial Co. v. CCE, Vadodara, 2003 and Turbotech Precision Engg. P. Ltd. v. CCE, Bangaiore-III, the respondents claim that a turnkey works contract, could be vivisected as sale contract and service contract, and thus a part of a works contract cannot be subjected to tax.

However, the Revenue stated that the decision in Daelim (supra) was not in accordance with the decision of the Supreme Court in BSNLv. VOl and was challenged in the Supreme Court. Considering the decision in Daelim’s case (supra) was not in accordance with the law, the case was referred to the Larger Bench to consider the correctness of the decision.

12. Valuation and S. 67:

Shakti Motors v. Commissioner of Service Tax, Ahmedabad, 2008 (12) STR 710 (Tri.-Ahmd.)

The assessee, an authorised dealer selling motor bikes and scooters, also provides business auxiliary services to various financial institutions. Servicetax was paid by the appellant before issue of show-cause notice and penalty was levied u/ s.76 and u/ s.77of Finance Act 1994.The appellant contended that the amount received was a cum – tax value, therefore actual demand should be reduced and requested waiver of penalty u/ s.80. It was held that amount received could not be treated as cum- service tax price as no evidence supported it. The benefits of S. 80 were granted considering confusions in budget of 2005.The liabilityof interest could not be set aside.

Redevelopment of Co-Operative Housing Societies — Tax Implications

INTRODUCTION

In the previous article (published in the October 2023 Issue), we had analysed the GST implications of joint development agreements executed between an owner of land and a developer of a real estate project. After highlighting the controversies surrounding the tax implications both under the erstwhile service tax regime as well as the GST regime, the article summarised the tax implications under the new scheme of taxation for real estate introduced through a series of notifications with effect from 1st April, 2019. Accordingly, it was summarised that a joint development agreement involving the sharing of the developed area between the owner of the land and the developer of a real estate project essentially may constitute a barter transaction consisting of two distinct deliverables:

Deliverable by the Owner to the Developer — The article examined whether the owner can be said to have supplied a service in the nature of the transfer of development rights and whether such service can be taxable in the hands of the promoter developer as a recipient of such service under reverse charge mechanism in view of the specific recitals of Entry 5B of Notification 5/2019-CT(Rate). The discussion can be summarised as under:

a. There is a school of thought to argue that no GST is attracted to the transfer of development rights under the development agreement. However, the said position would be litigative.

b. The value of the development rights is to be determined under Rule 27 as the open market value. Accordingly, the value adopted for stamp duty purposes can be considered to be the value.

c. The service would get classified under HSN 9972 and be liable for GST @ 18 per cent.

d. The tax is to be paid under the reverse charge mechanism by the developer.

e. The tax has to be paid on the date of issuance of the completion certificate for the project.

f. In view of a partial conditional exemption, GST is payable on a proportionate basis to the extent of the unbooked area as on the date of the completion certificate. For example, if 20 per cent of the developed area remains unbooked as of the date of the completion certificate, GST will be payable only to the extent of 20 per cent of the GST calculated amount.

DELIVERABLE BY THE DEVELOPER TO THE OWNER

The article further examined whether, to the extent of the flats allotted to the Owner, the Developer can be said to have provided construction services to the Owner warranting payment of GST. In this context, the article explained that Notification 6/2019-CT(Rate) prescribes that the promoter-developer will pay GST on the construction service provided by him against the consideration in the form of development rights at the time when the completion certificate is received. Further, para 2A of Notification 11/2017-CT(Rate) specifies that the value of construction service in respect of such apartments shall be deemed to be equal to the total amount charged for similar apartments in the project from the independent buyers nearest to the date on which such development right is transferred to the promoter. Considering the ad hoc deduction provided towards the land value, effectively GST @ 5 per cent becomes payable on the date of the receipt of the completion certificate in the case of residential apartments, again without any input tax credit.

In continuation of the above discussion, the current article focuses on a specific type of arrangement prevalent predominantly in metro cities where existing buildings already owned by co-operative societies and occupied by the members (who are owners of the units in the said buildings) are re-developed by developers through a redevelopment agreement.

UNDERSTANDING THE REDEVELOPMENT AGREEMENT

The typical need for redevelopment arises because the building is old and / or in a dilapidated condition and needs structural repairs involving substantial costs which the society/members are unable to bear themselves. Therefore, the society through its’ Managing Committee, seeks external participation for initiating redevelopment of the society. Such redevelopment process is fairly regulated (for example, in the State of Maharashtra, specific directives have been issued by the Government under Section 79(A) of Maharashtra Co-operative Societies Act, 1960 to all the Co-operative Housing Societies in the State of Maharashtra specifying the manner in which such redevelopment agreements should be executed.

Generally, the process of redevelopment involves the following steps:

a) After receiving approval from the members in the General Meeting, the society floats a tender inviting various developers to participate in the redevelopment process of the society.

b) The tender would impose the conditions on the applicants, such as obtaining the conveyance of the land on which the society is functioning, giving additional area to the existing members, providing alternate accommodation / compensation to the members during the period of redevelopment, corpus contribution, etc.,

c) The developers are expected to fill out the tender form and make an offer to the society.

d) At the tender opening meeting, the applications are opened where the Registrar of Society is a special invitee and the application most favourable to the society, i.e., which gives the maximum benefit to the society and its members is selected.

e) A redevelopment agreement (RDA) is entered into with the developer who is awarded the tender laying down the various terms and conditions negotiated with the society. The RDA is registered with the stamp duty authorities at which point of time, the transaction is valued, and appropriate stamp duty is paid on the same by the developer.

f) Post entering into the agreement, the developer’s first responsibility is to negotiate with the land-owner (if the conveyance of the society has not been obtained) and get the conveyance transferred to the society’s name. The expenses incurred in connection with the same are to the account of the developer and are generally to be borne by the developer only.

g) Once the conveyance is received, the developer is further expected to submit development plans to the authorities for approval. If the area intended to be developed is more than the development potential, the developer is further required to load FSI for which he needs to either make payment to the authorities / buy TDR from the open market.

h) Once approval is received, the developer may enter the premises and initiate the activity of redevelopment. Though not specifically warranted by the law, as a general practice, the Developer enters into Permanent Alternate Accommodation (PAA) agreements with all members separately reiterating the broad terms and conditions mentioned in the redevelopment agreement and identifying the particular unit in the newly constructed building which will be allotted to the member.

i) The members are expected to hand over the possession of their existing units to the developers. After obtaining the possession of the existing units and the necessary approvals from the authorities, the developer starts demolishing the structure and commences construction. During this period, the developer is expected to pay the monthly compensation to the members as agreed in the RDA / PAA.

j) Post-completion of construction, the developer is expected to hand over the units constructed for existing members which will mean the completion of the development process. The developer can sell the additional units constructed by him in the open market for consideration.

The above is the general flow of events in a typical RDA transaction. However, there can be variations in specific situations. For instance, when the building is in a dilapidated condition and is declared to be non-habitable or the development potential of the land has been consumed, the developer may not give any added benefits to the members but only the construction of the existing area.

JOINT DEVELOPMENT AGREEMENT VS. REDEVELOPMENT AGREEMENT

As analysed in the previous article, a joint development agreement is generally understood to be a barter whereby the landowner transfers a development right to the developer and the developer provides a constructed area to the landowner and both the legs of the barter constitute consideration for each other, with specific tax implications provided through notifications.

While the said notifications do not specifically cover the situation of a redevelopment agreement, it is generally felt that a redevelopment agreement being a variation of a joint development agreement, would bear similar tax consequences and accordingly, the entries imposing the tax obligations under reverse charge mechanism on the Developer for the receipt of development rights from the land owner and forward charge mechanism on the Developer for the allotment of units to the land owner should be applied to the redevelopment agreement as well. The responses to the FAQs issued by the CBIC also suggest a similar approach.

However, a minute comparison of the development agreement and a redevelopment agreement would suggest that there are fundamental differences between the two agreements.

Firstly, in a development agreement, there is a transfer of development rights in the underlying land with a commitment to eventually transfer the ownership rights in the land to the proposed society of the prospective buyers. In the case of a redevelopment agreement, in most of the cases, the co-operative society is already in existence and is the owner of the land. Therefore, such redevelopment agreements do not contain recitals to eventually transfer the ownership rights in the land to any third-party. Prior to, and after, the redevelopment process, the society was and continues to be the owner of the land. Through the redevelopment agreement, the society merely commits to the developer that it shall accept the applications of the prospective buyers for membership of the co-operative society and admit them as due members of the said society. As such, on a legal footing, it may be difficult to interpret that through a redevelopment agreement, rights are being transferred by the society to the developer.

Secondly, in a Development Agreement, the Developer and the Land owner are both liable to the prospective buyers as the agreement for sale is a tripartite agreement between the Developer, the Land owner and the prospective buyer. However, generally, in the case of a redevelopment agreement, the developer is typically in the position of a contractor and the buyers have no direct locus standi with the society (being the owner of the land).

In a series of decisions, where the developer fails to undertake development as committed resulting in a cancellation of the redevelopment agreement, the Courts have refrained from recognising the rights of the prospective buyers (who had bought units in the interim through registered agreements for sale) vis-à-vis the society (being the original land owner) and have held that the rights of such prospective buyers accrue only against the developers due to privity of contract between the said parties. Useful reference can be made to the observations of the Hon’ble Bombay High Court in the case of Vaidehi Akash Housing Pvt Ltd vs. D N Nagar CHS Union Limited as under:

16.5. The clauses quoted above, read together and in their proper perspective to be gathered from the whole agreement, clearly envisage the development and sale of the free sale component of the project by Vaidehi on their own account and as an independent contracting party, and not as agents of the Society. The contract between Vaidehi and the Society is on a principal-to-principal basis; it neither constitutes a partnership nor a joint venture or agency between the two. The third-party purchasers with whom Vaidehi might enter into agreements for sale would have no privity of contract with the Society and the Society would in no way be responsible for any claim made by such purchasers against Vaidehi under their respective agreements for sale.

16.6. There being no privity of contract between the Society and the third-party purchasers claiming under Vaidehi, the third-party purchasers cannot claim specific performance of their respective agreements for sale except through Vaidehi. They stand or fall by Vaidehi. If the rights of Vaidehi are brought to an end upon a lawful termination of the Society Development Agreement, the third-party purchasers cannot lay any independent claim against the Society or anyone claiming through the Society. The agreements with third-party purchasers are premised upon a valid, subsisting and enforceable agreement between their vendors, namely, Vaidehi and the owners, namely, the Society and in fact refer to the Society Development Agreement on this behalf. Admittedly, therefore, the third-party purchasers had, or at any rate, ought to have, notice of the Society Development Agreement and its terms and conditions, and Vaidehi’s obligations to perform the same. If Vaidehi fails to perform these obligations, the purchasers cannot but suffer the consequences. In other words, the purchaser’s rights are subject to Vaidehi’s rights and not higher than those. Therefore, from a contractual standpoint, the third-party purchasers have no case against the Society or Rustomjee, who claim through the Society.

Thirdly, in a development agreement, the area allotted to the landowner is generally meant for further sale. However, in the case of a redevelopment agreement, the area allotted to the existing members is not intended for sale. This distinction is relevant from two perspectives. Section 7 restricts the scope of supply only to the extent that the said supply is made in the course or furtherance of business. While there could be an ambiguity on whether a landowner supplies development rights in the course or furtherance of its business, clearly a society cannot be said to have supplied development rights in the course or furtherance of its business, notwithstanding the earlier argument that there is really no supply of development rights at all. Further, Entry 5(b) of Schedule II of the CGST Act, 2017 is triggered only when the complex or building is intended for sale to a buyer. In the context of the free area allotted to the existing member, it may be difficult to establish that the said activity constitutes a ‘sale’ and that the existing member is a ‘buyer’. In fact, in the context of RERA, the Tribunal has already taken a similar view and the same is analysed later in this article. It may be noted that Entry 5 of Schedule III treats all transactions of sale of land or building as neither supply of goods or services and the said Entry is only subject to the provisions of Entry 5(b) of Schedule II. If one is able to establish that Entry 5(b) of Schedule II is not applicable in the absence of an intention to sell to a buyer, the benefit of Schedule III should be available.

Fourthly, the entries related to the taxation of real estate are heavily anchored around the project being governed by RERA. For example, entry 3(i) reads as under:

Construction of affordable residential apartments by a promoter in a Residential Real Estate Project (herein-after referred to as RREP) which commences on or after 1st April, 2019 or in an ongoing RREP in respect of which the promoter has not exercised option to pay central tax on construction of apartments at the rates as specified for item (i.e.) or (if)below, as the case may be, in the manner prescribed therein, intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.

In the context of RERA, it has already been held that the free area is not covered by the RERA regulations as there is no sale involved. One may refer to the ruling of the Maharashtra Real Estate Appellate Tribunal in Savita Deokar vs. Bhalchandra Wadnerkar [Appeal No. AT00600000042047] wherein it has been held as under:

14. Appellant claims that a flat taker in rehab component is also an ‘allottee’ to whom a new flat or premises is allotted or transferred in lieu of vacation of flat held earlier by the flat taker. We do not find substance in the said contention of Appellant. As observed earlier, ‘allottees’ for the purpose of the RERA are only those persons, whose perform their obligations of paying consideration, etc. for the purchase of real estate. So far as flat taker in rehab component is concerned, they neither pay any consideration nor execute sale transaction, therefore, they cannot be equated with buyers of real estate envisaged to be covered by the RERA.

15. It is further observed that in the kind of project of hybrid nature like the project relating to Appellant, erstwhile occupants or members of the society cause the redevelopment by appointing a developer. Such a project has two components (1) rehab component, and (2) sale component. Developer normally provides free of costs permanent alternate accommodations to erstwhile occupants and in lieu of that gets incentives FSI/TDR to construct sale component. Developer is allowed to sell units in sale component to subsidise costs of unit of rehab component meant for original members/tenants. As the project involves sale of unit in sale component, such a project is required to be registered. Liability to register arises only on account of sale component. As the sanction is accorded to the whole project, the entire project mandatorily requires registration, It is often misconstrued as does the Appellant herein that on registering such a project, the RERA applies to the entire project including the rehab component. We would like to reiterate that as expressly provided U/S, 3(2)(c), since redevelopment is exempted from registration, the RERA provisions would apply only to sale component and not to rehab component upon registration of redevelopment project of hybrid nature. In view of the foregoing reasons, we are of the considered view that a redevelopment project or rehab component of a redevelopment project of hybrid nature do not fall within the purview of the RERA and flat taker/Appellant in rehab component is not entitled to any relief as provided under the RERA.

In view of the substantial differences between a joint development agreement and a redevelopment agreement, it is felt that the provisions relating to taxation of joint development agreements cannot be blindly adopted for the purposes of determining the tax consequences of redevelopment agreements.

GST IMPLICATIONS OF REDEVELOPMENT AGREEMENTS

If one is able to free oneself from the shackles of the entries drafted for taxation of the development agreements and look at redevelopment agreements independently of the said entries, one may examine the GST implications thereof with a fresh perspective. It is evident that there is an activity of construction undertaken by the developer for the existing members. However, as stated above, in a purely legal context, it may be difficult to decipher a flow of development rights from the society or the existing members to the developer. The identification of a consideration (even non-monetary) appears illusive. Even the agreements would suggest that the flats are to be constructed ‘free of cost’. At the same time, the basic principles of the Contract law would suggest that an agreement without consideration is not enforceable in law. It is in this context that a reference to the definition of consideration under section 2(31) of the CGST Act, 2017 becomes very relevant:

“consideration” in relation to the supply of goods or services or both includes —

(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:

If one analyses the general business rationale of a redevelopment agreement, it would be difficult to deny that:

a. The Society/existing members continue to enjoy the ownership of the land and the development rights therein at all points in time.

b. The freshly constructed units would therefore ideally accrue to the society/existing members and thus, the society/existing members should be entitled to consideration from the sale of such freshly constructed units to prospective buyers.

c. Through the redevelopment agreement, the society/existing members permit the developer to sell such units and appropriate the sale proceeds for himself.

It may therefore be possible to contend that essentially, the consideration for the construction activity carried out by the developer for the existing members is received from the prospective buyers as per the express authorisation in the redevelopment agreement. Effectively, therefore the price paid by the prospective buyer consists of not only the consideration for the construction service received by him but also the consideration for the construction service received by the existing members free of cost. It is evident that such composite consideration received from prospective buyers suffers GST at the hands of the developer. If that be so, the tax is effectively discharged on the construction service rendered by the developer to the existing members.

In fact, in the context of service tax, the Hyderabad Bench of the Tribunal in the case of Vasantha Green Projects vs. Commissioner [2019 (20) G.S.T.L. 568 (Tri. – Hyd.)] (for the period from April 2012 to March 2015) has accepted such an argument while dealing with the issue of taxability of free area in the context of redevelopment agreements. The observations of the Tribunal are reproduced below for ready reference:

12. It can be seen from the abovesaid instructions, the gross amount charged by the builder is liable to tax. The said instructions are in force till today and has not been withdrawn by the Board. As already detailed herein above, the appellant has discharged the service tax liability on the gross amount charged i.e. consideration received from land owners in the form of kind other than cash (value of the land/development rights) + consideration received from prospective buyers in cash by way of financial arrangements on the construction services undertaken by the appellant on joint development basis.We also note that appellant had declared the same in the books of account like IT returns and ST-3 returns which has been certified by Chartered Accountant wherein it is stated that service tax compliance is towards the payment of gross amount of the construction undertaken on joint development basis and received from the customers has been made. This leads to conclusion that it is evident that appellant has complied with the service tax liability on the construction undertaken on joint development basis on the value of construction which is mandated in Section 67 of Finance Act, 1994, read with rules made thereunder. In our view, if once the service tax liability has been discharged on the gross amount, demand of service tax on the same amount again would amount to double taxation.

The decision in the case of Vasantha Green has distinguished the LCS City Makers decision by concluding that the facts in both cases were different. Further, the said decision has been followed by the Mumbai Bench of the Tribunal in the case of Commissioner vs. Ethics Infra Development Pvt Ltd [2022-VIL-70-CESTAT-MUM-ST]. The Revenue has filed an appeal against the decision in the case of Vasantha Green and the matter is pending for finality before the Supreme Court.

To summarise the discussion, it can be argued that:
a. A redevelopment agreement is not similar to a development agreement and should be viewed independently to determine the tax consequences.

b. There is no transfer of development rights by the society to the developer in a redevelopment agreement.

c. A redevelopment agreement does not constitute a barter but merely a provision of construction service by the developer (who effectively becomes a contractor) to the existing member.

d. The consideration for the said construction service provided to the existing member is received from the prospective buyers and the discharge of GST on consideration received from the prospective buyers effectively discharges the tax liability even on the construction services rendered to existing members.

WHAT IF THE SUPREME COURT HOLDS OTHERWISE?

The above interpretation is subject to the final interpretation of the Supreme Court. If the Supreme Court upholds the decisions of the Mumbai and Hyderabad Tribunal, no GST can be demanded on the redevelopment agreements. However, if the Supreme Court holds otherwise, it may still be possible to argue that in the case of a redevelopment agreement, the developer essentially steps into the shoes of a contractor vis-à-vis the rehab component and he should not be subjected to taxation based on the entries provided for joint development agreement. In such as case, the following questions would need to be analysed:

a) What is the classification of the service provided by the developer?

b) What is the value of supply made by the developer?

c) When is the tax payable?

So far as the question of classification of the services provided by the developer is concerned, the developer undertakes construction for the society members. Therefore, the appropriate entry under notification 11/2017 — CT (Rate) dated 28th June, 2017, would be entry 3.

A perusal of entry 3, and more importantly clauses (i) to (if) thereof which apply to the real estate sector, shows that they apply when the construction is undertaken with the intention to sell to a buyer. As stated earlier, even the RERA Tribunal has held that the rehab area is not intended for sale and therefore, cannot be classified under (i) to (if) of entry 3 which specifically deals with the real estate sector. Accordingly, the conditions specified therein which require the developer to pay tax on free area, and prescribes the method to determine the value of supply, would also not apply. This would necessarily mean that the supply would be classifiable under the residuary clause of entry 3 as a works contract service and therefore, taxable at 18 per cent with corresponding proportionate credits becoming available to the developer. Further, the provisions of Para 2A dealing with valuation would also not be applicable and the same will have to be determined as per section 15.

This takes us to the next question of determining the value u/s 15. Section 15 provides that where the supplier and recipient are not related and the price is the sole consideration for the supply, the transaction value shall be taken as the value of the supply. Section 15 provides that price shall mean the price actually paid or payable for the supply of goods or services. In the case of the development agreement, the price being paid by the society members is the license to enter into the property and undertake development. Such redevelopment agreement is specifically valued for stamp duty purposes and applicable stamp duty paid on the same. Therefore, it can be said that the value adopted for the payment of stamp duty on the redevelopment agreement is the price which the society has paid to the developer for carrying out the activity of construction of a free area and therefore, GST if any shall be payable on the same only.

CONCLUSION

Real estate is a complex sector, and when it comes to redevelopment, the complexities increase as the number of stakeholders increases. It is therefore important that while drafting the agreements, not only all GST implications should be kept in mind, but also the consequences of a tax authority taking a contrary view and the effect of the same on the stakeholders should be considered.

Indirect Taxes

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MVAT UPDATE

Guidelines -institution of prosecution and compounding of offences

Trade Circular 5T of 2013 dated 24-07-2013 

In this circular guidelines regarding institution of prosecution and compounding of offences in case of non-filing of returns or late filing of returns have been provided.

SERVICE TAX UPDATE

91. VCES- CBES Clarification Circular No. 170/5/2013 -ST dtd. 18th August, 2013

The Voluntary Compliance Encouragement Scheme, 2013 (VCES) which has come into effect from 10-5- 2013 has given rise to a number of practical problems. Some of the issues raised with reference to the Scheme have been clarified by the Board vide Circular No. 169/4/2013-ST, dated 13-05-2013. Further to encourage the defaulting assessee to pay the tax dues for the period prescribed in the scheme with immunity from interest, penalties and other consequences of such non-payment, the CBEC has issued this circular in the question answer form to clarify all the doubts in a very simple and lucid manner.

levitra

Penalty provisions under MVAT Act, 2002

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VAT

Penal provisions :


Penal provisions can be bifurcated in two parts, (i) express
penal provisions, and (ii) provisions which are not expressly stated to be penal
provisions, but the nature of provisions operating as penal provisions.

Let us take the second part first. In this category the
following important provisions can be mentioned.

1. Assessment — S. 23(1) :


This Section reads as under :

“23. Assessment : (1) Where a registered dealer fails to
file a return in respect of any period by the prescribed date, the
Commissioner may assess the dealer in respect of the said period to the best
of his judgment without serving a notice for assessment and without affording
an opportunity of being heard :

Provided that, if after the assessment order is passed, the
dealer submits the return for the said period along with evidence of payment
of tax due as per the return or submits evidence of return for the said period
having been filed before passing of the assessment order along with evidence
of payment of tax due as per the return, then the Commissioner shall cancel,
by order in writing, the said assessment order and after such cancellation,
the dealer may be assessed in respect of the said period under the other
provisions of this Section :

Provided further that, such cancellation shall be without
prejudice to any interest or penalty that may be levied in respect of the said
period :

Provided also that no order, under this sub-section, shall
be passed after three years from the end of the year containing the said
period.”


The Section is in the nature of penal action. Failure to file
return within prescribed time will invite this ex parte best judgment
order. Therefore, if after due date, return for relevant period is not available
on the file of the officer, he can pass best judgment assessment order raising
any demand. This order can be passed by him without giving any notice or hearing
opportunity to the concerned dealer. As per S. 85(2)(b-1), no appeal can lie
against such order. This order can be cancelled only if one approaches the
authority with proof of filing return and with proof of payment of tax admitted
in the return.

The harsh effect of this provision will be that even if the
dealer has filed return but it has not reached the file of the officer, an ex
parte action may take place. It may be noted that now returnwise assessment
is possible and therefore if a dealer is liable to file monthly returns, there
can be 12 such ex parte orders.

The Section will operate more harshly if the dealer is not in
a position to make the payment of admitted dues. For example, a dealer is liable
to pay Rs.1 lakh in the month of Feb. 2008. If he has not filed return, an ex
parte order can take place. In such an order, demand will be based on the
best judgment of the officer and the demand may be raised at, say, Rs.5 lakhs,
etc. Now the dealer can get this order cancelled by filing the return of Feb.
2008 and on showing proof of payment of Rs.1 lakh admitted in the return. If it
is not done, then recovery and other penal actions for Rs.5 lakhs can go on.
Thus a dealer, who is not in good financial position to make payment of admitted
dues, will suffer the most. The only escape route will be to file the return in
time and apply for instalments. Before due date, filing of return without
payment is possible, but once the order u/s.23(1) is passed for non-filing of
return in time, the same order will get cancelled only on making payment of
admitted dues. Thus filing of return within due date is now an onerous duty on
the dealers.

The passing of order under this Section can be said to be a
completed assessment and the dealer cannot be assessed under other provisions
for the period covered by the said order till such order is cancelled. Upon
cancellation a dealer can be assessed under other regular provisions.

The time limit for passing the order under this Section is 3
years from the end of the year containing the period for which such order is to
be passed. For example, the time limit for passing ex parte order
u/s.23(1) for Feb. 2008 return will be March 2011.

The above provision appears to be against principles of
natural justice. It is giving unrestricted powers in the hands of the officers.

2. Classification of turnover — S. 28 :


This is one more Section not specifically stated to be penal
in nature, but operating as penal Section. The text of the Section is as under :

“28. Classification of turnover:- Where any Court or
Tribunal or any Appellate authority or any other authority passes an order in
appeal or review to the effect that any tax assessed under this Act or any
other Act should have been assessed under the provisions of a law other than
that under which it was assessed, then in consequence of such order, such
turnover or part thereof may be assessed to tax at any time within five years
from the date of such order, and where any assessment has already been made,
the assessment shall be modified after giving the dealer a reasonable
opportunity of being heard, notwithstanding that any provision regarding
limitation applies to such assessment period.”


This Section operates very harshly and practically the
benefit of litigating the matter for long gets vanished. In other words, the
Section seems to give premium on the inefficiency of the officers.

The working of this Section can be seen with an example. Suppose a dealer is assessed under the VATAct for certain turnover. The dealer litigates the matter and claims that the said turnover cannot be liable to tax under VAT.The Appellate authority including the High Court and the Supreme Court may accept the contention and may hold that the turnover is not liable under the VAT Act. Now at this juncture the Department can assess such turnover under any other relevant Act. For example, if turnover is to be assessed under the CST Act the Department can assess the dealer under the CST Act within 5 years from date of such appeal order. The above assessment will be without restriction of limitation provisions. For example, even after 30 years, the order under other Act can be passed, irrespective of the fact that the limitation to pass or modify the order under such other Act is already over.

The Section is to operate when the Appellate authority decides that the turnover should have been taxed under other Act, than the one under which it has been actually assessed. If appeal is under VAT Act it is difficult to anticipate how any Appellate authority will be able to make order relating to other Act. The Appellate authority may be able to say that the turnover is wrongly held liable under the VAT Act. However, if it directs to assess the turnover under some other Act like the CST Act, it will perhaps be without jurisdiction. Also if corresponding provisions under other Act are not in confirmity with the provisions of above S. 28, then the limitation as per such other Act should remain applicable. Though the intention of the Section is to cover the turnover under some other relevant Act, because of above requirement of order from the Appellate authority, etc., in our opinion, practically the section will have limited application.

3. Adjustment of payment:

One more silent penal provision is about adjustment of payment. Under the erstwhile BST Act the law was that any payment made towards dues as per any order was first to be adjusted against tax dues and balance towards interest, penalties, etc. Now the law is changed and a provision similar to ‘pathani vyaj’ is created. S. 40 reads as under:

“40. Adjustment of any payment :- Any payment made by a dealer or person in respect of any period towards any amount due as per any order passed under the Act shall first be adjusted, ex-cept insofar as the recovery of the said amount or part thereof is stayed U Iss.(6) of S. 26, against the interest payable by him on the date of payment in respect of the said period and thereafter towards the amounts due as a penalty, sum for-feited and fine. Any amount remaining unadjusted shall then be adjusted towards the tax payable in respect of that period.”

As per this Section any payment against dues created by any order, will first be adjusted towards interest, then penalties and the balance, if any, towards tax. Thus the person will run the post-order interest till he pays out entire amount of the order. It seems the Government’s thinking is now more on the commercial basis rather than a fiscal statute to collect tax. Such treatment deserves strong objection. It is necessary that the law is amended at the earliest to save dealers from such humiliating provisions.

4. Set-off  – S. 48(5) :

This Section relates  to set-off. The Section reads as under:

“48. Set-off, refund,  etc. :

(1)–

(2)–

(3)–

(4)–

(5)    For the removal of doubt it is hereby declared that, in no case the amount of set-off or refund on any purchase of goods shall exceed the amount of tax in respect of the same goods, actually paid, if any, under this Act or any earlier law, into the Government treasury except to the extent where purchase tax is payable by the claimant dealer on the purchase of the said goods effected by him :

Provided that, where tax levied or leviable under this Act or any earlier law is deferred or is deferrable under any Package Scheme of Incentives implemented by the State Government, then the tax shall be deemed to have been received in the Government Treasury for the purposes of this sub-section. “

Though the intention of this Section is to protect the revenue loss, the same will hit innocent purchasing dealers very gravely. Though the purchasing dealer might have paid tax to his vendor, the failure of the vendor to discharge his liability to Government will disentitle the purchasing dealer from claiming set-off. This will happen without any defence or protection to the purchasing dealer.

In normal course, the purchasing dealer will claim set-off in the period in which he has affected the purchases. But the set-off so claimed will get disallowed if the Sales Tax Department proves that the vendor has not paid the tax on his sale of goods. What we fail to appreciate is that the Government has all the machinery to collect the money from defaulter. The Government can utilise its powers, including prosecution, etc. to recover the tax from that defaulting dealer who has sold the goods, issued tax invoice, collected tax, but has not depos-ited the same into the Government Treasury. However without performing its duty, just on very prima facie case of non-payment of tax by the vendor, if set-off is disallowed to purchasing dealer, then it will cause great injustice to the purchasing dealer. For inefficiency of the Department the purchasingdealer will have to suffer. It may be noted here that there is no machinery available to the purchasing dealer to check whether the vendor has made payment of his taxes or not. Thus the Section operates without any defence in the hands of the purchasing dealer. Under VAT,every dealer will be claiming set-off of taxes paid on his purchases and even one single weak link in the chain may disentitle set-off to every succeeding purchasing dealer.

5. Agreements to be void – S. 57:

This is one more mischievous Section under the VAT Act. The Section reads as under:

“57. Agreement to defeat the intention and application of the Act to be void: (1) If the Commissioner is satisfied that an arrangement has been entered into between two or more persons or dealers to defeat the application or purposes of this Act or any provision of this Act, then the Commissioner may by order declare the arrangement to be null and void as regards the application and purposes of this Act. He may, by the said order, provide for increase or decrease in the amount of tax payable by any person or dealer who is affected by the arrangement whether or not such dealer or person is a party to the arrangement, in such manner as the Commissioner considers appropriate so as to counteract any tax advantage obtained by that dealer from or under the arrangement.

(2)    For the purposes  of this Section,

(i)    ‘arrangement’ includes any contract, agreement, plan or understanding, whether enforceable in law or not, and all steps and transactions by which the arrangement is sought to be carried into effect;

(i)    ‘tax advantage’  includes,-

(a)    any reduction in the liability of any dealer to pay tax,

(b)    any increase in the entitlement of any dealer to claim set-off or refund,

(c)    any reduction in the sale price or purchase price receivable or payable by any dealer.

(3)    Before passing any order under this Section, the Commissioner shall afford a reasonable opportunity of being heard to any such person or dealer whose tax advantage is sought to be counteracted.”

It means now the Department has unrestricted powers to go beyond the agreements and to declare them void.

Although, the practical implications of this Section are yet to be seen, however, there are fears that Departmental officers may interfere in the normal sale/purchase transactions and in spite of the fact that the dealer has charged correct price as per his policy, the officer may take action to enhance the same by substituting the said price, using above powers. The Section does not speak of any proof before initiating action under this Section. It only speaks of reasonable opportunity of hearing. So even on mere suspicion an officer may give hearing and after such empty formality, pass an order enhancing the tax liability. The Section should have been with burden of providing contrary proof by the Department before initiating the provisions of this Section.

6.    Assessment proceedings, etc. not to be invalid on certain grounds – S. 62 :

This is one more Section safeguarding the inefficiency of Department. The Section reads as under:

“62. Assessment proceedings, etc., not to be invalid on certain grounds:
(1)    No assessment (including review, appeal, rectification, penalty and forfeiture, notice, summons or other proceedings furnished, made or issued or taken or purported to have been furnished, made or issued or taken in pursu-ance of any of the provisions of this Act shall be invalid or shall be deemed to be invalid merely by reason of any mistake, defect or omission in such assessment, notice, sum-mons or other proceedings, if such assess-ment, notice, summons or other proceedings are, in substance and effect in conformity with or according to the intent, purposes and re-quirements of this Act.

(2)    The service of any notice,  order  or communication shall not be called in question, if the said notice, order or communication, as the case may be, has already been acted upon by the dealer or person to whom it is issued or which service has not been called in question at or in the earlier proceedings commenced, continued or finalised pursuant to such notice, order or communication.

(3)    No order, including an order of assessment, review, appeal or rectification, penalty or for-feiture passed under the provisions of this Act shall be invalid merely on the ground that the action could also have been taken by any other authority under any other provisions of this Act.”

The text of the Section is sufficient to draw a conclusion that no responsibility is kept on the officer. He may take action in any way or serve notice the way he likes, no invalidity in order will take place. Up till today, any such deficiency is considered as nullifying the resultant order and there are number of judgments on this count. A reference can be made to judgment in the cases of CIT v. Bhushan Mallick, (55 CTR 73) (Cal.) and Kiran Oil Mills (S.A. 508 of 95 & 537 of 97 dated 31-5-2003), wherein defect in notice is considered as sufficient to declare the or-der as invalid. Similar is the position in respect of service of notice, especially when it is the case of revision, reassessment, etc. Reference can be made to the judgments in case of Prakash Electronics (S.A. 642 & 643 of 1995, dated 12-6-1998) and Zakaria Karim & Brothers (S.A. 68 of 1997, dated 9-10-1998).

However all this has been set at naught. This Section may be misused and in case of genuine injustice also, the dealer will not be able to come out of the clutches of this Section.

Above few provisions are illustrative of how penal provisions have been silently enacted without mentioning them as penal provisions.

Penalty provisions under MVAT Act, 2002

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VAT

Penal provisions : (Part-2)


(Part-1 published in the November issue of BCAJ)

Express penal provisions :

The express penal provisions are those which are specifically
so stated in the VAT Act. A brief summary of these provisions is as under :

Penalties — S. 29 :

S. 29 of the VAT Act provides for different types of
penalties. There are several sub-sections providing for levy of penalty. However
there are certain common provisions applicable to the above sub-sections. It
will be better if these common provisions are discussed first and then the
individual sub-sections can be discussed separately.

S. 29(11) :

This sub-section reads as under :


“(11) No order levying penalty under the foregoing
provisions of this Section shall be passed in respect of any period after
five years from the end of the year containing the said period :”



This sub-section lays down time limit, viz., 5 years
from the end of year, containing the period for which penalty is to be levied.
Thus, if penalty is to be levied for return period of February 2006, the time
limit will be March 2011.

A question will arise in cases where new actions are
initiated, like review, within their respective time limits. In such orders
penalty can be levied. It appears that even if such new action may be within the
time, the penalty can be levied in such proceedings only if it is within the
time limit of above 5 years.

S. 29(12) :

The Section reads as under :


“(12) No order imposing a penalty under any of the
foregoing sub-sections shall be made, —

(a) by a Sales Tax Officer or an Assistant Commissioner
where the penalty exceeds rupees five lakh except with the prior approval of
the Deputy Commissioner;

(b) by a Deputy Commissioner or a Senior Deputy
Commissioner, where the penalty exceeds rupees ten lakh except with the
prior approval of the Joint Commissioner :

Provided that nothing in this sub-section shall apply to
any penalty which may be imposed by an appellate authority.”


The Section is self-explanatory. The procedure for obtaining
approval is not given and whether the dealer will get hearing before such
approval is also not clear.

However the proviso makes it very clear that the appellate
authorities will not require any such permission.

The intention behind such a system of prior approval seems to
be to have some control over lower authorities. An incidental issue, which may
arise is whether the first appellate authority like the Deputy Commissioner or
Joint Commissioner (Appeals) will be able to give relief in case of appeal
relating to such penalty ? Since the penalty would be levied with approval of an
officer of equal rank, it is possible that such appellate authorities may drag
cold feet and may not tinker with the penalty order.

S. 29(13) :

The Section reads as under :

“(13) For the purposes of this Section, Commissioner
includes any appellate authority appointed or constituted under this Act.”


Thus the Section does away with the controversy
arising under the BST Act, 1959. The dispute lingered long under the BST Act, as
to whether Commissioner includes appellate authority or not. Now due to above
specific provision the confusion is clear and Commissioner will include
appellate authorities.

In other words, appellate authorities including the Tribunal
will get jurisdiction to levy penalty even while passing appeal orders.

One more common feature of penalty provisions u/s.29(3) to
u/s.29(9)(c) is that there is no discretion about the quantum. The penalty
amount/s have already been provided in the Section itself. However, there is
another view, according to which despite of fixed amount provided in the
Section, the authorities can levy lesser amount depending upon facts of the
case. It will be a matter of interpretation. The sales tax authorities may take
a view that the amount is fixed. Accordingly the issue before authorities will
be to decide whether to levy penalty or not. Once decided to levy, a fixed sum
may be levied.

It may be a matter of debate whether the penalties should be
of fixed amount or not ? The argument of the Department is that it will reduce
corruption as fixed amount is to be levied, there is no discretion. But dealers
fear that this will increase corruption at the stage of initiation of penalty.

S. 29(3) :

The levy S. 29(3) reads as under :

“(3) While or after passing any order under this Act, in
respect of any person or dealer, the Commissioner, on noticing or being
brought to his notice, that such person or dealer has concealed the
particulars or has knowingly furnished inaccurate particulars of any
transaction liable to tax or has concealed or has knowingly mis-classified any
transaction liable to tax or has knowingly claimed set-off in excess of what
is due to him, the Commissioner may, after giving the person or dealer a
reasonable opportunity of being heard, by order in writing, impose upon him,
in addition to any tax due from him, a penalty equal to the amount of tax
found due as a result of any of the aforesaid acts of commission or omission.”

The ingredients are clear. The concealment of transaction
liable to tax, knowingly misclassifying the turnover or knowingly claiming
excess set-off will be ground for levy of penalty under this Section. Words like
‘concealment’ and ‘knowingly’, sufficiently provide that the Department should
prove the mens rea before levying penalty.

The order levying this penalty can be made while passing an order or even after passing any order. The action can be taken on suo motu findings or on the findings brought to his notice. Who can bring to notice is not clarified and hence even an outsider can bring to the notice of officer and the penalty action can be initiated.

The Section envisages hearing opportunity and passing of written order  for levying  penalty.

The quantum of penalty will be equal to tax found payable because of the above acts of commission or omission.

S. 29(4):

The Section reads  as under  :

“(4) Where any person or dealer has knowingly issued or produced any document including a false bill, cash memorandum, voucher, declaration or ‘certificate by reason of which any transaction of sale or purchase effected by him or any other person or dealer is not liable to be taxed or is liable to be taxed at a reduced rate or incorrect set-off is liable to be claimed on such transaction, the Commissioner may, after giving the person or dealer a reasonable opportunity of being heard, by order in writing, impose on him in addition to any tax payable by him, a penalty equal to the amount of tax found due as a result of any of the afore-said acts of commission or omission.”

The ‘Section’ envisages levy of penalty equal to tax amount found due as a result of the acts of commission or omission given in the above Section. The acts are about issue or production of false bill, voucher, declarations, etc. by which the tax payable is avoided or resulting in excess set-off. The other ingredients of the Section are same as above i.e., the order should be after hearing opportunity and be in writing. The mens rea clause applies here also as the provision speaks of acts of commission and omission knowingly.

S. 29(5):

This Section is inserted from 20-6-2006 :

“(5) Where a dealer has sold any goods and the sale is exempt, fully or partly, from payment of tax by virtue of any provision contained in Ss.(3), Ss.(3A), Ss.(3B) or Ss.(5) of S. 8, and the purchaser fails to comply with the conditions or restrictions subject to which the exemption is granted, then the Commissioner may, after giving the said purchaser a reasonable opportunity of being heard, impose penalty on him equal to one and a half times the tax which would have become payable on the sale if the said exemption was not avail-able on the said sale.”

The Government is empowered to provide concessional rate of tax for particular class of dealers by issue of Notification ul s.8(3), u/’ s.8(3A), u/ s. 8(3B) and ul s.8(5). The class of dealers so specified can effect purchases at 4% even though otherwise the goods are liable @ 12.5%. The Government has issued such Notifications under above Sections and allowed concessional rate to organisations like electric power generating company, etc. Now this penalty is provided if the dealer purchases the goods by utilising concession provided ul s.8(5) and fails to comply with the conditions of such concessional rate. The quantum of penalty is one and half time of the concession availed. There is no levy of purchase tax, which used to be there under the BST Act in case of contravention. Under the MVAT Act the Government intends to compensate for loss of revenue due to unauthorised use of concession by levy of penalty at the above quantum. Of course, it being a penalty, the normal defence available to the dealer viz., absence of mens rea, etc. will remain applicable here also.

29(6) :

The Section reads  as under:

“(6) Where, any person or dealer contravenes the provision of S. 86, so as to have the quantum of tax payable by him to be under-assessed, the Commissioner may, after giving the person or dealer a reasonable opportunity of being heard, by order in writing, impose on him, in addition to any tax payable by him a penalty equal to half the amount of tax which would have been under-assessed or one hundred rupees, whichever is more.”

The provisions of S. 29(6) apply when there is contravention of provisions of S. 86. S. 86 is about tax invoice and other bills, cash memorandum, etc. The quantum of penalty is linked with under-assessment because of non-compliance of invoice provisions and the same will be 50% of the said under-assessment. It is necessary to note that the words ‘knowingly’, etc. are missing here and hence it appears that the principles of mens rea will not apply here. However ultimately it being a penalty provision the mens rea indirectly creeps in as observed by the Supreme Court in case of Hindustan Steel Ltd. (25 STC 211).

29(7):

The Section reads  as under    :

“(7) Where, any person or dealer has failed without reasonable cause to comply with any notice in respect of any proceedings, the Commissioner may, after giving the person or dealer a reasonable opportunity of being heard, by order in writing, impose on him, in addition to any tax payable by him, a penalty equal to Rs.1000.”

It provides for levy of penalty for non-compliance of any notice, etc. without reasonable cause. The amount is Rs.1000. The penalty, in my opinion, applies, qua each proceedings and not multiple number of notices within one proceedings.

S. 29(8):

The Section reads  as under  :

“(8) Where, any person or dealer has failed without reasonable cause to file within the prescribed time, a return for any period as provided u/s.20, (…. ) the Commissioner may, after giving the person or dealer a reasonable opportunity of being heard, by order in writing, impose on him, in addition to any tax payable by him, a sum of rupees ten thousand by way of penalty. Such penalty shall be without prejudice to any other penalty, which may be imposed under this Act:

Provided that, if the return is filed before the initiation of the proceeding for levy of penalty, the penalty shall be levied at rupees five thousand and in any other case, the penalty shall be levied at rupees ten thousand.”

The Section is resembling to S. 36(4A), etc. under the BST Act, 1959. It speaks about levy of penalty if return is not filed within stipulated period. The penalty will be Rs.10000. However if return is not filed within permissible period, but it is filed before any action is initiated under the above S. 29(8), the penalty will be at Rs.5000.

Since a fixed sum of Rs.10000 and 5000 is prescribed, it appears that the penalty is contemplated for each act of default. However, depending upon the situation of filing, the penalty amount will vary i.e., it may be Rs.10000 or Rs.5000. Only if the dealer proves reasonable cause for default, the penalty may not be levied, else it will become a routine in each case.

S. 29(9)(c) :

The Section reads  as under:

“(9)(c) Where a dealer has filed a return and such return is found to be not complete and self-consistent, then the Commissioner may, after giving the dealer a reasonable opportunity of being heard, impose on him, by order in writing, a penalty of rupees one thousand. The levy of penalty shall be without prejudice to any other penalty which may be imposed under this Act.”

The penalty under this Section gets attracted where the dealer fails to file complete and self-consistent return. The complete and self-consistent return is to be seen in light of S. 20(1)(b)and Rule 20 of the VAT Rules.

The above provisions provide for correcting return within one month of serving of defect memo and if one fails to carry out the said corrections, penalty u/s.29(9)(c) at Rs.1000will be attracted.

S. 29(10):

The Section reads as under:

“(10) Where a person or dealer has collected any sum by way of tax in contravention of the provisions of S. 60, –

a) he shall be liable to pay a penalty not exceeding two thousand rupees, and

b) in addition, any sum collected by the person or dealer in contravention of S. 60shall be for-feited to the State Government.

If the Commissioner, in the course of any proceeding under this Act or otherwise, has reasons to believe that any person has become liable to a penalty or forfeiture or both penalty and forfeiture of any sum under this sub-section, he may serve on such person a notice in the prescribed form requiring him on a date and at a place specified in the notice to attend and show cause why a penalty or forfeiture or both penalty and forfeiture of any sum as provided in this sub-section should not be imposed on him. The Commissioner shall thereupon hold an inquiry and shall make such order as he thinks fit. When any order of forfeiture is made, the Commissioner shall publish or cause to be published a notice thereof for the information of the persons concerned giving such details and in such manner as may be prescribed.”

The above penalty is about forfeiture of excess collection of tax. The Section provides for forfeiture as well as penalty for the same. This is the only Section where the penalty is provided as not exceeding Rs.2000, i.e., the authorities can levy penalty as per their discretion from Re.1 to Rs.2000.The other procedure of forfeiture is the same as it was under the BSTAct, 1959.The officer has to issue a notice for the purpose of forfeiture of tax. S. 60 provides the mode of determining the excess collection,hence reference is required to be made to the said Section for correctly knowing the scope of forfeiture. If for-feiture is made, the details of the same should be published in the format given in Rule 39.

Indirect Taxes

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MVAT UPDATE

MVAT NOTIFICATION

Notification No. VAT 1512/CR 115/Taxation-1 dated 16.05.2013

By this Notification, Rule 55B is inserted with effect from 15-10-2011 for applicability of set-off to developers and units in Special Economic Zone.

Notification No. VAT 1513/CR 61/Taxation-1 dated 21.05.2013

By this Notification, the Government of Maharashtra has made certain further amendments in the Maharashtra Value Added Tax Rules, 2005.

Amendments to Schedule Entries and Notifications under the Maharashtra Value Added Tax Act 2002 Trade Circular No. 3T of 2013 dated 10.06.2013

In this Circular, Commissioner has briefly discussed the amendments in Schedule entry of the Maharashtra Value Added Tax Act, 2002 & in certain Notifications. These amendments are made to give effect to the budget proposals.

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